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Policy Instruments to Lean Against the Wind in Latin America
This paper reviews policy tools that have been used and/or are available for policy makers in the region to lean against the wind and review relevant country experiences using them. The instruments examined include: (i) capital requirements, dynamic provisioning, and leverage ratios; (ii) liquidity requirements; (iii) debt-to-income ratios; (iv) loan-to-value ratios; (v) reserve requirements on bank liabilities (deposits and nondeposits); (vi) instruments to manage and limit systemic foreign exchange risk; and, finally, (vii) reserve requirements or taxes on capital inflows. Although the instruments analyzed are mainly microprudential in nature, appropriately calibrated over the financial cycle they may serve for macroprudential purposes.
Are Currency Crises Predictable?
This paper studies whether exchange rate expectations and overvaluations are predictors of currency crises. The results suggest that overvaluation has predictive power in explaining crises. However, although expected depreciation obtained from survey data partially takes different measures of exchange rate misalignment into consideration, expectations fail to anticipate currency crises.
Fostering Growth in Europe Now
Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff and are published to elicit comment and to further debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues. This Web-only series replaced Staff Position Notes in January 2011.
Managing Abundance to Avoid a Bust in Latin America
Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff and are published to elicit comment and to further debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues. This Web-only series replaced Staff Position Notes in January 2011.
Capital Flows and the Twin Crises
This paper develops a model that focuses on the interaction of liquidity creation by financial intermediaries with capital flows and exchange rate collapses. The intermediaries’ role of transforming maturities is shown to result in larger movements of capital and a higher probability of crisis. These movements resemble the observed cycle in capital flows: large inflows, crisis and abrupt outflows. The model highlights how adverse productivity and international interest rate shocks may trigger a sudden outflow of capital and an exchange collapse. The initial shock is magnified by the behavior of individual foreign investors linked through their deposits in the intermediaries. The expectation of an eventual exchange rate crisis links investors’ behavior even further.
Per Jacobsson Lecture
Latin America: Outlook and Challenges Ahead
2021 Comprehensive Surveillance Review — Overview Paper
Fund surveillance needs to evolve to face the economic and financial challenges that will shape the global landscape for years to come. This paper first takes stock of the current economic and financial landscape. To better serve the membership in this context, Fund surveillance should be prioritized around four key priorities: (i) confronting risks and uncertainties: policymakers will need to actively manage the risks of a highly uncertain outlook; (ii) preempting and mitigating adverse spillovers: shifting patterns of global economic integration will bring about new channels for contagion and policy spillovers; (iii) fostering economic sustainability: a broader understanding of sustainability to better account for the impact of economic and non-economic developments on stability; and (iv) unified policy advice: better accounting for the trade-offs and synergies among different policy combinations in the face of limited policy space and overlapping priorities, tailored to country-specific circumstances. These priorities should further enhance the traction of Fund surveillance.
Chile
Chile’s strong fiscal framework has served the country well. The fiscal rule has helped insulate the budgets from volatility in resource prices and economic activity. The sovereign wealth fund (SWF)—the Economic and Social Stabilization Fund (ESSF) and the Pension Reserve Fund (PRF)—was established to encourage savings over time and has provided buffers for stabilizing the economy. During the pandemic, Chile has appropriately used the ESSF to provide swift and impactful support to protect people. Recent efforts to upgrade the fiscal framework— adopt a medium-term fiscal path, formalize a prudent debt ceiling, and introduce an escape clause—can further safeguard fiscal sustainability.
