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Output Gap in Presence of Financial Frictions and Monetary Policy Trade-offs
The recent global financial crisis illustrates that financial frictions are a significant source of volatility in the economy. This paper investigates monetary policy stabilization in an environment where financial frictions are a relevant source of macroeconomic fluctuation. We derive a measure of output gap that accounts for frictions in financial market. Furthermore we illustrate that, in the presence of financial frictions, a benevolent central bank faces a substantial trade-off between nominal and real stabilization; optimal monetary policy significantly reduces fluctuations in price and wage inflations but fails to alleviate the output gap volatility. This suggests a role for macroprudential policies.
Republic of Poland
Following a strong rebound from the pandemic, the Polish economy in 2022 faced energy and food price shocks, which exacerbated inflationary pressures and slowed economic growth. With Russia’s war in Ukraine, the authorities seek to increase defense expenditures and energy security.
Monetary Policy and Financial Stability
The issue of using monetary policy for financial stability purposes is hotly contested. The crisis was a reminder that price stability is not sufficient for financial stability, financial crises are costly, and policy should aim to decrease the likelihood of crises, not only rely on dealing with their repercussions once they occur. It is clear that well-targeted prudential policies (including micro and macroprudential regulation and supervision) should be pursued actively to attenuate the buildup of financial risks. The question is whether monetary policy should be altered to contain financial stability risks. Should it lend a hand by temporarily raising interest rates more than warranted by price and output stability objectives? Keeping rates persistently higher is also possible, but more costly.
Morocco
Climate change is both a major threat and a source of opportunities for Morocco’s development. On one hand, Morocco is one of the world’s most water-stressed countries, and water scarcity is a serious constraint to the country’s ambition to transition to a new model of development. The authorities are planning to boost investment in water infrastructure, but this should be complemented by demand management reforms that bring the price of water closer to its actual cost and induce a shift in consumption behavior. On the other hand, Morocco can take advantage of its abundant competitive renewable energy resources to reduce its still high dependence on fossil fuels. Decarbonizing the ener...
The Gambia
This 2015 Article IV Consultation highlights that The Gambia has experienced large balance of payments and fiscal imbalances, caused by persistent policy slippages in recent years and financial difficulties in public enterprises. The IMF supported the authorities’ efforts through a Rapid Credit Facility (RCF) disbursement in early April 2015 and a Staff-Monitored Program (SMP). However, major policy slippages have occurred since the RCF disbursement, pushing the SMP off track and worsening the outlook considerably. In light of the elevated level of public debt, the government should prioritize infrastructure investments that help address poverty and improve the business environment. The authorities are encouraged to continue their efforts to improve supervision capacity to enhance financial stability.
Ireland
Ireland’s economy has rebounded strongly from the pandemic. GDP surpassed its pre-pandemic trend in 2021:Q4—one of the few euro area countries to do so. COVID-support measures have been appropriately unwound, and the fiscal position improved significantly. The financial sector weathered the pandemic crisis well and remains resilient. While the outlook is strong, uncertainty is substantial due to the indirect impacts of the war in Ukraine. Several pre-pandemic challenges remain: housing shortages, infrastructure, social and green investment gaps, and the need to strengthen multinational enterprises’ inward linkages to broaden growth and make it more inclusive. There is also a need to address the Global Financial Crisis (GFC) legacy effects on the financial system and tackle the factors contributing to high lending interest rates.
(Not) Dancing Together
This paper provides estimates of the government spending multiplier over the monetary policy cycle. We identify government spending shocks as forecast errors of the growth rate of government spending from the Survey of Professional Forecasters (SPF) and from the Greenbook record. The state of monetary policy is inferred from the deviation of the U.S. Fed funds rate from the target rate, using a smooth transition function. Applying the local projections method to quarterly U.S. data, we find that the federal government spending multiplier is substantially higher under accommodative than non-accommodative monetary policy. Our estimations also suggest that federal government spending may crowd-in or crowd-out private consumption, depending on the extent of monetary policy accommodation. The latter result reconciles—in a unified framework—apparently contradictory findings in the literature. We discuss the implications of our findings for the ongoing normalization of monetary conditions in advanced economies.
IMF Research Bulletin, September 2015
The September 2015 issue of the IMF Research Bulletin covers a range of research topics. The Research Summaries featured in this issue are “Lower for Longer: Neutral Rates in the United States” (Andrea Pescatori and Jarkko Turunen) and “Economic Principles for Resource Revenue Management” (Anthony J. Venables and Samuel Wills). The Q&A article looks at “Seven Questions on Financing for Development” (Amadou Sy) and the global development agenda. The issue also includes special announcements on the 2015 Annual Research Conference and the 2015 IMF Annual Report, as well as new IMF publications. Readers will also find a link to a top-viewed article from the “IMF Economic Review”—the IMF’s official research journal.
Republic of Poland: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Poland
The Polish economy has rebounded strongly, with policy actions limiting the damage from the pandemic-induced recession by supporting employment and avoiding unnecessary bankruptcies. While the pandemic continues to take a toll on lives, the economy has been less impacted by successive waves of the pandemic.
Open Banking
"Consumers are growing more aware of the importance and value of the data they personally generate across industries and domains. Financial services is one such area where the link between one's personal data and its economic value is most clearly established, and consumers are beginning to agitate for and gain a measure of agency over their data. A study of the phenomenon of open banking provides a focused lens on the broader phenomena of data proliferation and data monetization. Thus, open banking and its related legal and economic issues along with policy ideas, such as consumer financial data rights, can serve as an interesting model for the broader policy discussion on general data righ...
