During the past financial year, the IMF’s 189 member countries faced a number of pressing challenges. IMF work on these challenges—slower trade, declining productivity, gender inequality, inclusive growth, and debt management—is a central focus of this 2017 Annual Report.
Unlike most nonfinancial corporations, in a market-based economy, banks are subject to a special regime of licensing, regulation, and supervision (hereinafter also “prudential regulation”). In a market-based economy, the function of banks differs from that of other enterprises, calling for special treatment of banks by the state.
Banks require a strong legal framework providing certainty concerning their rights and obligations under the law and permitting them to enforce their financial claims expeditiously and effectively against counterparties in default. Conversely, weaknesses in the legal system that create uncertainties concerning the existence and enforceability of property rights increase the risk that, as debtors hiding behind such weaknesses default on their obligations, banks will not be able to collect on their claims. Inefficiencies in the judicial processing of financial claims by banks may inhibit the marketing of financial assets and reduce their value; this often results in unhealthy accumulations of nonperforming assets on banks’ balance sheets, weakening the banking system as a whole. Meanwhile, banks will cover these risks and market inefficiencies in the form of higher charges, creating upward pressure on transaction costs throughout the economy.
Regulatory intervention includes all action taken by the bank regulator with respect to a bank in response to continuing violations of prudential law (banking law, implementing regulations, etc.) on the part of that bank. Thereby, the bank regulator intervenes directly or indirectly in the bank’s management and operations.
This paper empirically examines the long-run relationship between real exchange rates and real interest rate differentials over the recent floating exchange rate period, using a panel cointegration method, with data for a set of industrialized countries. The paper finds evidence of statistically significant long-run relationships and plausible point estimates, which contrasts with much existing evidence. The failure of others to establish such relationships may reflect the estimation method they use rather than any inherent deficiency of the fundamentals-based models.
This paper discusses how decentralized countries can achieve sound fiscal relations between the central government and lower government levels. The concepts of “vertical gap” and “vertical balance” provide an analytical framework for identifying and addressing key challenges. These concepts can help policymakers ensure that the financing of subnational governments (composed of transfers received from the center, own revenues, and borrowing) is both efficient and adequate given the allocation of spending responsibilities. More generally, the paper offers some perspectives about the optimal design of decentralization systems by examining the sequencing and economic principles underlying revenue and expenditure assignments, the use of transfers, and borrowing.
European Economic and Monetary Union does not envisage creating a central fiscal authority. Monetary and exchange rate policies will be centralized, but fiscal policy will remain a national responsibility, in line with the subsidiarity principle. This paper argues that monetary union will generate pressures for closer economic integration than currently envisaged. Although not a necessity, a more active central role could then be justified on the grounds of allocative efficiency, redistribution, and stabilization. While in the short term enhanced policy coordination may address those pressures satisfactorily, as economic integration proceeds, the case for a central fiscal authority may become stronger.
This paper explores factors behind Canadian banks' relative resilience in the ongoing credit turmoil. We identify two main causes: a higher share of depository funding (vs. wholesale funding) in liabilities, and a number of regulatory and structural factors in the Canadian market that reduced banks' incentives to take excessive risks. The robust predictive power of the depository funding ratio is confirmed in a multivariate analysis of the performance of 72 largest commercial banks in OECD countries during the turmoil.
This paper presents a new measure of capital flow pressures in the form of a recast Exchange
Market Pressure index. The measure captures pressures that materialize in actual international
capital flows as well as pressures that result in exchange rate adjustments. The formulation is
theory-based, relying on balance of payments equilibrium conditions and international asset
portfolio considerations. Based on the modified exchange market pressure index, the paper
also proposes the Global Risk Response Index, which reflects the country-specific sensitivity
of capital flow pressures to measures of global risk aversion. For a large sample of countries
over time, we demonstrate time variation in the effects of global risk on exchange market
pressures, the evolving importance of the global factor across types of countries, and the
changing risk-on or risk-off status of currencies.
This paper highlights the changing collateral landscape and how it may shape the global demand/supply for collateral. We first identify the key collateral pools (relative to the “old” collateral space) and associated collateral velocities. Post-Lehman and continuing into the European crisis, some aspects of unconventional monetary policies pursued by central banks are significantly altering the collateral space. Moreover, regulatory demands stemming from Basel III, Dodd Frank, EMIR etc., new net debt issuance, and collateral connectivity via custodians (e.g., Euroclear/ Clearstream/ BoNY etc) will affect collateral movements.