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How to Measure the Monetary Stance
This note provides a conceptual framework to organize discussions of the appropriateness of the monetary policy stance and presents tools that country teams can employ to measure, report, and evaluate the stance of monetary policy. The note focuses exclusively on aggregate demand considerations--on whether the stance is tight or loose--without considering whether such a stance is appropriate for achieving policy objectives. The latter requires considering aggregate supply and Phillips Curve trade-offs. The note does not cover other macroeconomic policies, such as macroprudential or fiscal measures, which could also have a considerable impact on the effectiveness of monetary policy.
Republic of Croatia
This Article IV Consultation highlights that the economic expansion continues, driven primarily by private consumption and exports of goods and services. Discussions primarily focused on increasing the economy’s flexibility and resilience. Fiscal performance has been strong, however, the materialization of contingent liabilities from government guarantees is likely to reduce the overall surplus. Low public and private investment, and continued emigration appear to weigh on medium-term growth prospects. Downside risks in the near-term stem could be due to possible changes in regional or global economic and financial conditions, and the further realization of contingent liabilities. The IMF staff advocated for a moderately faster fiscal adjustment. The report recommends accelerating the pace of debt reduction that would build fiscal space and help reduce downside risks. The Central Bank may need to address potentially tighter external conditions while continuing with strong bank supervision and macroprudential policies. Additional measures to prevent excessive household borrowing could be considered if needed.
Macroeconomic Developments and Prospects in Low-Income Developing Countries - 2016
This paper is the third in a series assessing macroeconomic developments and prospects in low-income developing countries (LIDCs). The first of these papers (IMF, 2014a) examined trends during 2000–2014, a period of sustained strong growth across most LIDCs. The second paper (IMF, 2015a) focused on the impact of the drop in global commodity prices since mid-2014 on LIDCs—a story with losers (countries dependent on commodity exports, notably fuel) and winners (countries with a more diverse export base, where growth remained robust). The overarching theme in this paper’s assessment of the macroeconomic conjuncture among LIDCs is that of incomplete adjustment to the new world of “lower ...
Is High Debt Constraining Monetary Policy? Evidence from Inflation Expectations
This paper examines whether high government debt levels pose a challenge to containing inflation. It does so by assessing the impact of government debt surprises on inflation expectations in advanced- and emerging market economies. It finds that debt surprises raise long-term inflation expectations in emerging market economies in a persistent way, but not in advanced economies. The effects are stronger when initial debt levels are already high, when inflation levels are initially high, and when debt dollarization is significant. By contrast, debt surprises have only modest effects in economies with inflation targeting regimes. Increased debt levels may complicate the fight against inflation in emerging market economies with high and dollarized debt levels, and weaker monetary policy frameworks.
The Effects of Inflation on Public Finances
Does inflation help improve public finances? This paper documents the dynamic responses of fiscal variables to an inflation shock, using both quarterly and annual panel data for a broad set of economies. Inflation shocks are estimated to improve fiscal balances temporarily, as nominal revenues track inflation closely, while nominal primary expenditures take longer to catch up. Inflation spikes also lead to a persistent reduction in debt to GDP ratios, both due to the primary balance improvement and the nominal GDP denominator channel. However, debt only falls with inflation surprises—rises in inflation expectations do not improve debt dynamics, suggesting limits to debt debasement strategies. The results are robust to using various inflation measures and instrumental variables.
Tax Revenue Mobilization Episodes in Emerging Markets and Low-Income Countries: Lessons from a New Dataset
How do countries mobilize large tax revenue—defined as an average increase in the tax-to-GDP ratio of 0.5 percent per year over three years or more? To answer this question, we build a novel dataset covering 55 episodes of large tax revenue mobilization in low-income countries and emerging markets. We find that: (i) reforms of indirect taxes and exemptions are the most common tax policy measures; (ii) multi-pronged tax administration reforms often go hand in hand with tax policy measures or are stand alone; and (iii) sustainability of the episodes hinges on tax administration reforms in the key compliance areas (risk-based audits, registration, filing, payment, and reporting).
Monetary Policy in Disaster-Prone Developing Countries
This paper analyzes monetary policy regimes in emerging and developing economies where climate-related natural disasters are major macroeconomic shocks. A narrative analysis of IMF reports published around the occurrence of natural disasters documents their impact on important macroeconomic variables and monetary policy responses. While countries with at least some degree of monetary policy independence typically react by tightening the monetary policy stance, in a sizable number of cases monetary policy was accommodated. Given the lack of consensus on best practices in these circumstances, a small open-economy New-Keynesian model with disaster shocks is leveraged to evaluate welfare under alternative monetary policy rules. Results suggest that responding to inflation to an extent sufficient to keep inflation expectations anchored, while allowing temporary deviations from its target is the welfare maximizing policy. Alternative regimes such as strict inflation targeting, exchange rate pegs, or Taylor rules explicitly responding to economic activity or the exchange rate would be welfare-detrimental.
Household Debt and Borrower-Based Measures in Finland: Insights from a Heterogeneous Agent Model
We analyze the effects of borrower-based macroprudential tools in Finland. To evaluate the efficiency of the tools, we construct a heterogeneous agent model in which households endogenously determine their housing size and liquid asset levels under two types of borrowing constraints: (i) a loan-to-value (LTV) limit and (ii) a debt-to-income (DTI) limit. When an unexpected negative income shock hits the economy, we find that a larger and more persistent drop in consumption is observed under the LTV limit compared to the DTI limit. Our results indicate that although DTI caps tend to be unpopular with lower income households because they limit the amount they can borrow, DTI caps are beneficial even on distributional grounds in stabilizing consumption. Specifically, DTI caps mitigate the consumption decline in recessions by restricting high leverage, and thus, they can usefully complement LTV caps.
How Should Credit Gaps Be Measured? An Application to European Countries
Assessing when credit is excessive is important to understand macro-financial vulnerabilities and guide macroprudential policy. The Basel Credit Gap (BCG) – the deviation of the credit-to-GDP ratio from its long-term trend estimated with a one-sided Hodrick-Prescott (HP) filter—is the indicator preferred by the Basel Committee because of its good performance as an early warning of banking crises. However, for a number of European countries this indicator implausibly suggests that credit should go back to its level at the peak of the boom after the credit cycle turns, resulting in large negative gaps that might delay the activation of macroprudential policies. We explore two different approaches—a multivariate filter based on economic theory and a fundamentals-based panel regression. Each approach has pros and cons, but they both provide a useful complement to the BCG in assessing macro-financial vulnerabilities in Europe.
Guinea-Bissau
This paper discusses Guinea-Bissau’s First and Second Reviews Under the Extended Credit Facility (ECF) arrangement, Request for Rephasing of Disbursements, Modification of Performance Criteria, and Financing Assurances Review. All performance criteria for the first and second reviews were met. The IMF staff discussions with the authorities focused on measures to fill the 2016 financing gap that resulted from the loss of budget support and steps to reignite structural reforms. The authorities undertook remedial measures, including declaring the bank bailout operation null and void and measures to address weaknesses in public financial management. The IMF staff supports completion of the first and second reviews under the ECF arrangement and the authorities’ requests for modification of performance criteria and rephasing of disbursements.
