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Olivier J. Blanchard, Mr. David Romer, A. Michael Spence, and Joseph E. Stiglitz

Young people, hardest hit by the global economic downturn, are speaking out and demanding change. F&D looks at the need to urgently address the challenges facing youth and create opportunities for them. Harvard professor David Bloom lays out the scope of the problem and emphasizes the importance of listening to young people in "Youth in the Balance." "Making the Grade" looks at how to teach today's young people what they need to get jobs. IMF Deputy Managing Director, Nemat Shafik shares her take on the social and economic consequences of youth unemployment in our "Straight Talk" column. "Scarred Generation" looks at the effects the global economic crisis had on young workers in advanced economies, and we hear directly from young people across the globe in "Voices of Youth." Renminbi's rise, financial system regulation, and boosting GDP by empowering women. Also in the magazine, we examine the rise of the Chinese currency, look at the role of the credit rating agencies, discuss how to boost the empowerment of women, and present our primer on macroprudential regulation, seen as increasingly important to financial stability. People in economics - C. Fred Bergsten, American Globalist. Back to basics - The multi-dimensional role of banks in our financial systems.

The consensus view of the literature is that foreign direct investment (FDI) in general has a favorable impact on productivity and exports.2 FDI can be resource-seeking or market-seeking, and the former type boosts exports directly. But both types of FDI also have indirect impacts through positive externalities and spillover effects: they may bring capital and knowhow to domestic industries, have positive externalities on domestic companies through competition and reduced costs of inputs, and help host country exporters to gain access to foreign market. Although in theory FDI could adversely affect domestic producers by competing for markets and skilled employees, empirical evidence tends to support that the benefits of FDI significantly outweigh its costs for host countries.


Current account imbalances have increased steadily in rich countries over the past 20 years. While the U.S. current account deficit dominates the numbers and the news, other countries, especially within the euro area, are also running large deficits. These deficits are different from the Latin American deficits of the early 1980s, or the Mexican deficit of the early 1990s. They involve rich countries; they reflect mostly private saving and investment decisions, and fiscal deficits often play a marginal role; and the deficits are financed mostly through equity, FDI foreign direct investment, and own-currency bonds rather than through bank lending. Yet there appears to be a widely shared concern that these deficits are too large, and government intervention is required. My purpose is to examine the logic of this argument. I ask the following question: Assume that deficits reflect private saving and investment decisions. Assume also that people and firms have rational expectations. Should the government intervene, and, if so, how? To answer the question, I construct a simple benchmark. In the benchmark, the outcome is “first best” and there is no need nor justification for government intervention. I then introduce simple distortions in either goods, labor, or financial markets, and characterize the equilibrium in each case. I derive optimal policy and the implications for the current account. I show that optimal policy may or may not lead to smaller current account deficits. I see the model and the extensions very much as a first pass. Sharper conclusions require a better understanding of the exact nature and the extent of distortions, which we do not have yet. Such understanding is needed, however, to improve the quality of the current debate.

International Monetary Fund. European Dept.

This Selected Issues paper assesses the youth unemployment problem in advanced European economies, especially the euro area. Youth unemployment rates increased sharply in the euro area after the crisis. Much of these increases can be explained by output dynamics and the greater sensitivity of youth unemployment to economic activity compared with adult unemployment. Labor market institutions also play an important role, especially the tax wedge, minimum wages, and spending on active labor market policies. The paper highlights that policies to address youth unemployment should be comprehensive and country specific, focusing on reviving growth and implementing structural reforms.

International Monetary Fund. European Dept.

This Selected Issues paper on Euro Area Policies 2013 Article IV Consultation highlights the monetary transmission mechanism and monetary policies. The European Central Bank has announced the Outright Monetary Transactions framework to address severe distortions in sovereign bond markets and safeguard monetary transmission. The cost of unsecured bond issuance remains elevated for both core and periphery banks, but there is a growing divergence between the two, driven mainly by rising periphery spreads. Weak growth and high levels of private balance sheet debt in the periphery are weighing on the health of bank balance sheets.

International Monetary Fund


This paper provides a survey of some issues concerning the evolution of the European Monetary System (EMS) in the context of increasingly integrated financial markets. It reviews the objectives of the EMS, its institutional structure, its perceived impact on key macroeconomic variables, and some criticisms of its current arrangements. It also describes the 1992 program to unify, inter alia, financial markets and then discusses the pressures that a more integrated financial marketplaces on country authorities and on financial firms. The prospective structural changes in European financial markets raise the issues of whether and how the EMS can continue to constitute a zone of monetary stability. Although the growing integration of financial markets is likely to increase the interdependence between monetary policies in the EMS countries, a nominal anchor could still be maintained by having the Bundesbank continue to lead the way on the course of monetary policy, or by formulating monetary policy on the basis of an index of traded goods prices, or through more far-ranging coordination of monetary policies.

International Monetary Fund. External Relations Dept.
Recovery from the deepest recession in 60 years has started. But sustaining it will require delicate rebalancing acts, both within and across countries. IMF chief economist Olivier Blanchard writes in our lead article that the turnaround will not be simple. The crisis has left deep scars that will affect both supply and demand for many years to come. This issue of F&D also looks at what’s next in the global crisis and beyond. We look at ways of unwinding crisis support, the shape of growth worldwide after the crisis, ways of rebuilding the financial architecture, and the future of reserve currencies. Jeffrey Frankel examines what’s in and what’s out in global money, while a team from the IMF’s Research Department looks at what early warning systems can be expected to deliver in spotting future problems. In our regular People in Economics profile, we speak to Nobel prize winner Daniel Kahneman, whose work led to the creation of the field of behavioral economics, and our Picture This feature gives a timeline of how the Bank of England’s policy rate has fallen to its lowest level in 300 years. Back to Basics gives a primer on monetary policy, and Data Spotlight looks at how the crisis has affected the eastern European banking system.