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How Does Learning Affect Inflation After a Shift in the Exchange Rate Regime?
This paper analyzes the consequences of a shift from a floating to a pegged exchange rate regime on the actual and expected inflation rate, in an environment of asymmetric information. Policymaking is endogenous and the public learns rationally. There are two main findings. First, there is a “honeymoon effect” after the regime change, where inflation is lower than in the long run. Second, the asymmetric information outcome converges to that of symmetric information in the long run.
South Africa
This 2014 Article IV Consultation highlights that South Africa’s growth has slowed in recent years, specifically relative to other emerging markets. Although weak trading partners’ growth contributed to the slowdown, increasingly binding structural constraints, such as protracted strikes and electricity constraints, have been important factors. Unemployment remains high at 25.5 percent. Notwithstanding expenditure discipline, the general government budget deficit was 4.5 percent of GDP in 2013, and public debt rose to 45 percent of GDP from 27 percent in 2008. The outlook is lackluster with considerable risks. Growth is projected to slow to 1.4 percent in 2014 and rebound only modestly to 2.1 percent in 2015 on improved industrial relations.
An Econometric Analysis of the Determinants of Inflation in Turkey
High and variable inflation has been a central feature of the Turkish economy since the 1970s. This paper seeks to shed some light on the determinants of inflation in Turkey by analyzing price determination within the framework of a multi-sector macroeconomic model during 1970–95. The main findings are that monetary variables (initially money, more recently the exchange rate) play a central role in the inflationary process, that public sector deficits contribute to inflationary pressures, and that inertial factors are quantitatively important. Policymakers’ commitment to active exchange rate depreciation on several occasions in the past 15 years has also contributed to the inflationary process.
Trade Tensions, Global Value Chains, and Spillovers
Europe is deeply integrated into global value chains and recent trade tensions raise the question of how European economies would be affected by the introduction of tariffs or other trade barriers. This paper estimates the impact of trade shocks and growth spillovers using value added measures to better gauge the associated costs across European countries.
The Design of IMF-Supported Programs
This publication contains a collection of papers which examine the design of IMF-supported programmes during the years 1995-2000 in both middle-income and low-income countries. The analysis covers objectives and outcomes, policy formulation and programme design, and experiences in relation to macroeconomic and structural policies.
Fiscal Rules
Over the past decade, Lesotho and Swaziland have faced significant volatility in their fiscal revenues, owing to highly unstable Southern African Customs Union (SACU) receipts. Based on model analysis, this paper explores the advantages of implementing fiscal rules to deal with such volatility. It finds that the use of a structural balance target could smooth the growth impact from revenue shocks while helping preserve sufficient international reserves during bad times. From a long-term perspective, it suggests possible welfare gains from introducing fiscal rules. Last, it concludes that, based on experiences in other countries, developing strong institutions and improving public financial management are necessary steps to ease the transitions to a rules-based fiscal policy framework.
Corporate Liquidity and Solvency in Europe during COVID-19: The Role of Policies
The spread of COVID-19, containment measures, and general uncertainty led to a sharp reduction in activity in the first half of 2020. Europe was hit particularly hard—the economic contraction in 2020 is estimated to have been among the largest in the world—with potentially severe repercussions on its nonfinancial corporations. A wave of corporate bankruptcies would generate mass unemployment, and a loss of productive capacity and firm-specific human capital. With many SMEs in Europe relying primarily on the banking sector for external finance, stress in the corporate sector could easily translate into pressures in the banking system (Aiyar et al., forthcoming).
Portugal
The Portuguese economy has sustained its dynamic recovery from the pandemic. Driven by private consumption and external demand, growth in 2022 was markedly higher than the euro area (6.7 percent versus 3.5 percent). Growth is projected to slow to 2.6 percent in 2023, with downdrafts from higher cost of living on domestic demand and a slower external demand growth. Headline inflation is expected to decline from 8.1 percent in 2022 to 5.6 percent in 2023, with core inflation declining more gradually. Near-term risks to the outlook are broadly balanced—key downside risks arise from tighter-than-projected financial conditions and weaker global growth, offset by upsides from tourism.
Calibrating Macroprudential Policies in Europe Amid Rising Housing Market Vulnerability
Housing market developments are in the spotlight in Europe. Over-stretched valuations amid tightening financial conditions and a cost-of-living crisis have increased risks of a sustained downturn and exposed challenging trade-offs for macroprudential policy between ensuring financial system resilience and smoothing the macro-financial cycle. Against this backdrop, this paper provides detailed considerations regarding how to (re)set macroprudential policy tools in response to housing-related systemic risk in Europe, providing design solutions to avoid unintended consequences during a tightening phase, and navigating the trade-offs between managing the build-up of vulnerabilities and the macro-financial cycle in a downturn. It also proposes a novel framework to measure the effectiveness of tools and avoid overlaps by quantifying the risks addressed by different macroprudential instruments. Finally, it introduces a taxonomy allowing to assess a country’s macroprudential stance and whether adjustments to current policy settings are warranted—such as the relaxation of capital-based tools and possibly some borrower-based measures in the event of a more severe downturn.
