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Woon Gyu Choi, Taesu Kang, Geun-Young Kim, and Byongju Lee
This paper distills and identifies global liquidity (GL) momenta from the macro-financial data of advanced economies through a factor model with sign restrictions as policy-driven, market-driven, and risk averseness factors. Using a panel factor-augmented VAR, we investigate responses of emerging market economies (EMEs) to GL shocks. A policy-driven liquidity increase boosts growth in EMEs, elevating stock prices and currency values, while a risk averseness rise has an opposite effect. A market-driven GL expansion boosts stock markets and lowers funding costs, promoting competitiveness and current account. Inflation targeting EMEs fare better than EMEs under alternative regimes with respect to macrofinancial volatility.
Mr. Tamim Bayoumi


There have been numerous books examining the 2008 financial crisis from either a U.S. or European perspective. Tamim Bayoumi is the first to explain how the Euro crisis and U.S. housing crash were, in fact, parasitically intertwined. Starting in the 1980s, Bayoumi outlines the cumulative policy errors that undermined the stability of both the European and U.S. financial sectors, highlighting the catalytic role played by European mega banks that exploited lax regulation to expand into the U.S. market and financed unsustainable bubbles on both continents. U.S. banks increasingly sold sub-par loans to under-regulated European and U.S. shadow banks and, when the bubbles burst, the losses whipsawed back to the core of the European banking system. A much-needed, fresh look at the origins of the crisis, Bayoumi’s analysis concludes that policy makers are ignorant of what still needs to be done both to complete the cleanup and to prevent future crises.

Mr. Seok G Park
Although central banks have recently taken unconventional policy actions to try to shore up macroeconomic and financial stability, little theory is available to assess the consequences of such measures. This paper offers a theoretical model with which such policies can be analyzed. In particular, the paper shows that in the absence of the fiscal authorities' full backing of the central bank's balance sheet, strange things can happen. For instance, an exit from quantitative easing could be inflationary and central banks cannot successfully unwind inflated balance sheets. Therefore, the fiscal authorities' full backing of the monetary authorities' quasi-fiscal operations is a pre-condition for effective monetary policy.
International Monetary Fund
Honduras’s Third Review under the Poverty Reduction and Growth Facility and Request for Waiver and Modification of Performance Criteria are discussed. The current stance of monetary and exchange rate policies are broadly appropriate, and financial sector reforms are proceeding. Progress has been made in strengthening monetary operations and the prudential framework. The authorities will introduce measures to control the risk of dollar lending to nondollar earners and to limit the net open foreign exchange position of banks.
International Monetary Fund. External Relations Dept.
Higher oil prices, a rising euro, and softer global demand are beginning to take their toll on Europe’s brittle economic upturn. Will the euro area’s two largest economies, Germany and France, be able to sustain their recoveries without losing sight of the pressing goals of fiscal consolidation and comprehensive structural reforms? Alessandro Leipold, mission chief for France and Deputy Director of the IMF’s European Department, and Ajai Chopra, mission chief for Germany and Senior Advisor, talk with Conny Lotze of the IMF Survey about recent developments and how the two countries can meet the challenges ahead.
International Monetary Fund


This Manual provides guidance on the implementation of the Code of Good Practices on Fiscal Transparency by setting out its principles and practices in detail, and establishing priorities for improving fiscal transparency. Serving as a reference for economists and financial analysts on the various aspects of fiscal transparency, the Manual includes a section on open budget preparation, execution, and reporting, and presents the OECD’s best practices for achieving budget transparency.

Mr. Barry J. Eichengreen and Mr. Donald J Mathieson
This paper examines the determinants of the currency composition of international reserves. Our single most important finding is the striking stability over time of the relationship between the demand for reserves denominated in different currencies and its principal determinants: trade flows, financial flows and currency pegs. This result contrasts sharply with recent predictions of sharp shifts in the currency composition of central banks’ holdings of foreign exchange. The message would seem to be that in this, as in other respects, the international monetary system is in a mode of gradual, continuous evolution, not of rapid, discontinuous change.
International Monetary Fund
This Selected Issues paper examines the operational independence and the conduct of monetary policy in the United Kingdom. The paper describes the inflation targeting framework and the analytics of the decision-making process. It suggests that inflation targeting, although not entirely new in terms of the basic idea, is a rather significant step toward establishing a workable and well-defined framework for monetary policy. The paper also describes structure, mandate, and policy issues associated with the financial services authority.
Mr. Paul Louis Ceriel Hilbers, Mr. Arto Kovanen, and Mr. Charles Enoch
The European Monetary Institute has been working with national central banks of the European Union (EU) to prepare instruments for the operation of monetary policy in Stage 3 of European Economic and Monetary Union. Several publications describing the proposed arrangements have been issued. This paper briefly summarizes the arrangements and identifies some areas in which important decisions still have to be made or refinements introduced—including the choice of counterparties in fine-tuning open market operations; the design of reserve requirements; the signaling function of monetary operations; and payment system relationships with non-EMU participants in the EU.