Read more about the article Macroeconomic Policy Regime Change in Advanced Economies

Macroeconomic Policy Regime Change in Advanced Economies

Three significant changes to the macroeconomic policy regime in advanced economies, compared to the post-global financial crisis period, have unfolded in the last two years. First, fears of a chronic insufficiency of aggregate demand as a growth deterrent prevailing after the 2008 global financial crisis, have been superseded by supply-side shocks and inflation. Second, as a result of the first change, the era of abundant and cheap liquidity provided by central banks has given way to higher interest rates and liquidity squeezes. Finally, because of the previous changes, there was a strong devaluation of financial assets in 2022. There are now fears about multiple possibilities of financial shocks ahead.

Continue ReadingMacroeconomic Policy Regime Change in Advanced Economies
Read more about the article Quantitative Tightening and Capital Flows to Emerging Markets

Quantitative Tightening and Capital Flows to Emerging Markets

In addition to hikes in basic interest rates, liquidity conditions in the US economy will also be affected by the shrinking of the Fed's balance sheet starting this month. The "quantitative easing" (QE) that resumed strongly in March 2020, in response to the financial shock at the beginning of the pandemic, will now give way to a "quantitative tightening". How complementary - or substitute - will be those movements in interest rates and balance sheet downsizing? What are their likely consequences on capital flows to emerging markets?

Continue ReadingQuantitative Tightening and Capital Flows to Emerging Markets
Read more about the article A Possible Tug-of-war Between the Fed and the Markets

A Possible Tug-of-war Between the Fed and the Markets

There appears to be a double divergence between the market and the Fed. The inflation projections embedded in bond prices remain above those presented by the Fed. In addition, there appears to be a discrepancy between the mode of action announced by the Fed and what the markets predict as the Fed’s ‘reaction function’. The 10-year rise in market yields this year has been more pronounced than in previous times of instability, such as the 2013 taper tantrum and the sell-off of government bonds. The Fed's current complacency in relation to long yields can always be superseded by a revision of such a position for the sake of stabilization, if volatility increases in the long part of the yield curve.

Continue ReadingA Possible Tug-of-war Between the Fed and the Markets
Read more about the article Central Banks and Inequality

Central Banks and Inequality

As in the period after the 2007-08 global financial crisis, voices have been raised talking about monetary policy and central banks as drivers of income and wealth inequality. The unconventional policies of “quantitative easing” protect the holders of financial assets and value their properties, while workers cross a rough patch on the real side of the economy. Financial markets have disconnected from hardships in the street of commons, with the help of the policies of monetary authorities. Does it make sense to assign an impact of concentration of income and wealth to central bankers' policies? It's complicated...

Continue ReadingCentral Banks and Inequality
Read more about the article Quantitative easing in emerging market economies

Quantitative easing in emerging market economies

The pandemic global financial shock has sparked the inclusion of QE as a policy tool also available for central banks of EME. Nonetheless: - QE targets are on the yield structures of interest rates. If there are fragilities leading to high basic, short-term interest rates, QE will not get much in terms of results. - QE should not raise concerns about “fiscal dominance”, because otherwise it will be self-defeating. Capital outflow pressures may exacerbate. - A prolonged stay of central banks as buyers in local currency bond markets may distort market dynamics. A permanent role of the central bank as a market maker, especially in primary markets, will impair the development of the domestic financial market. Consideration should also be given to the effect of asset purchase programs on possible overvaluation of assets, as well as on collateral availability in the banking system and its impact on the policy rate transmission

Continue ReadingQuantitative easing in emerging market economies
Read more about the article Whither Interest Rates in Advanced Economies: Low for Long?

Whither Interest Rates in Advanced Economies: Low for Long?

The action of central banks has been more reactive than proactive, more reflex than cause, and in their absence, macroeconomic performance would have been even more mediocre than it has been. There is a mismatch between the trend of increasing stocks of financial wealth, occasionally cut by shocks and crises, and the creation and incorporation of new assets accompanying economic expansion. COVID-19 is helping reinforce such trends.

Continue ReadingWhither Interest Rates in Advanced Economies: Low for Long?
Read more about the article The Next Financial Crisis

The Next Financial Crisis

More than a decade has passed since the Global Financial Crisis and the age of unconventional monetary policies has not ended. More recently, monetary policy has been eased in 70% of the world economy, negative yielding debt has reached US$ 15 trillion, financial conditions have eased and could ease further. As it tends to happen when very low interest rates and search for yield remain for long, financial system vulnerabilities have continued to build. We may well be on the verge of a new financial crisis. • Where are the key rising vulnerabilities in the global financial system? • Has the rise in debt of emerging and frontier markets spurred by global low interest rates and availability of external finance been matched with corresponding asset creation? • To what extent has heightened trade and policy uncertainty affected financial flows? • What should policymakers do to address rising financial vulnerabilities?

Continue ReadingThe Next Financial Crisis
Read more about the article Threat of ‘currency bullying’

Threat of ‘currency bullying’

The possibility of mutually damaging financial volatility in the US and China may limit the extent of 'currency bullying' being used as a proxy in the countries' trade war. Nonetheless, rhetoric from Washington is likely to remain clamorous as the US trade and current account deficits rise and global imbalances worsen.

Continue ReadingThreat of ‘currency bullying’