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Filippo Balestrieri and Mr. Suman S Basu
We analyze a union of financially-integrated yet politically-sovereign countries, where households in the Northern core of the union lend to those in the Southern periphery in a unified debt market subject to a borrowing constraint. This constraint generates sudden stops throughout the South, depresses the intra-union interest rate, and reduces Northern welfare below its unconstrained level, while having ambiguous effects on Southern welfare. During sudden stops, Pareto improvements can be achieved using North-to-South governmental loans if Southern governments have the capacity to commit to repay, or using a combination of Southern debt relief and budget-neutral taxes and subsidies if they do not. From the pre-crisis perspective, it is Pareto-improving to allow loans and debt relief to be negotiated in later sudden-stop periods as long as the regions in the union are sufficiently heterogeneous to begin with. We show that our results are robust to production and to limited financial openness of the union.
International Monetary Fund


A speech delivered by the IMF's Managing Director Christine Lagarde at the German Institute for Economic Research (DIW) as part of the Institute's Europe Lecture Series in Berlin, Germany, on March 26, 2018.

Ms. Alla Myrvoda and Julien Reynaud
This paper empirically investigates international and domestic monetary policy transmission mechanisms in the Eastern Caribbean Currency Union (ECCU). We assess interest rate pass-through of both the U.S. policy rate and the ECCU minimum saving deposit rate (MSR) into domestic interest rates through the interest rate channel. While economic theory suggests that the international pass-through should be high in small open economies with fixed exchange rates and open capital accounts, our findings, based on regression analysis, point to a low long-run pass-through coefficient of the U.S. interest rate. The domestic transmission channel, however, is found to operate through changes in the MSR. The results hold for different interest rates (deposit and lending) and are supported by survey-based findings.
Mr. Eugenio M Cerutti and Haonan Zhou
This paper analyses the nature of the increasing regionalization process in global banking. Despite the large decline in aggregate cross-border banking lending volumes, some parts of the global banking network are currently more interlinked regionally than before the Global Financial Crisis. After developing a simple theoretical model capturing banks' internationalization decisions, our estimation shows that this regionalization trend is present even after controlling for traditional gravitational variables (e.g. distance, language, legal system, etc.), especially among lenders in EMs and non-core banking systems, such as Australia, Canada, Hong Kong, and Singapore. Moreover, this regionalization trend was present before the GFC, but it has increased since then, and it seems to be associated with regulatory variables and the opportunities created by the retrenchment of several European lenders.
Mr. Helge Berger, Mr. Giovanni Dell'Ariccia, and Mr. Maurice Obstfeld
The paper makes an analytical contribution to the revived discussion about the euro area’s institutional setup. After significant progress during the euro crisis, the drive to complete Europe’s Economic and Monetary Union (EMU) had stalled, and the way forward will benefit from an in-depth look at the conceptual issues raised by the evolution and architecture of Europe, and the tradeoffs involved. A thorough look at the underlying economic issues suggests that in the long run, EMU will benefit from progressing along three mutually supporting tracks: introduce more fiscal risk sharing, helping to make the sovereign “no bailout” rule credible; complementary financial sector reforms to delink sovereigns and banks; and more effective rules to discourage moral hazard. This evolution would ensure that financial markets provide incentives for fiscal discipline. Introducing more fiscal union comes with myriad legal, technical, operational, and political problems, raising questions well beyond the remit of economics. But without decisive progress to foster fiscal risk sharing, EMU will continue to face existential risks.
Mr. Seung M Choi, Ms. Laura E. Kodres, and Jing Lu
This paper examines whether the coordinated use of macroprudential policies can help lessen the incidence of banking crises. It is well-known that rapid domestic credit growth and house price growth positively influence the chances of a banking crisis. As well, a crisis in other countries with high trade and financial linkages raises the crisis probability. However, whether such “contagion effects” can operate to reduce crisis probabilities when highly linked countries execute macroprudential policies together has not been fully explored. A dataset documenting countries’ use of macroprudential tools suggests that a “coordinated” implementation of macroprudential policies across highly-linked countries can help to stem the risks of widespread banking crises, although this positive effect may take some time to materialize.
Mr. Luis Catão, Valeriya Dinger, and Daniel Marcel te Kaat
Using a sample of over 700 banks in Latin America, we show that international financial liberalization lowers bank capital ratios and increases the shares of short-term funding. Following liberalization, large banks substitute interbank borrowing for equity and long-term funding, whereas small banks increase the proportions of retail funding in their liabilities, which have been particularly vulnerable to flight-to-quality during periods of financial distress in much of Latin America. We also find evidence that riskier bank funding in the aftermath of financial liberalizations is exacerbated by asymmetric information, which rises on geographical distance and the opacity of balance sheets.
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.