Hans Weisfeld, Mr. Irineu E de Carvalho Filho, Mr. Fabio Comelli, Rahul Giri, Klaus-Peter Hellwig, Chengyu Huang, Fei Liu, Mrs. Sandra V Lizarazo Ruiz, Alexis Mayer Cirkel, and Mr. Andrea F Presbitero
In recent years, Fund staff has prepared cross-country analyses of macroeconomic vulnerabilities in low-income countries, focusing on the risk of sharp declines in economic growth and of debt distress. We discuss routes to broadening this focus by adding several macroeconomic and macrofinancial vulnerability concepts. The associated early warning systems draw on advances in predictive modeling.
Mr. Bas B. Bakker, Marta Korczak, and Mr. Krzysztof Krogulski
In the last decade, over half of the EU countries in the euro area or with currencies
pegged to the euro were hit by large risk premium shocks. Previous papers have
focused on the impact of these shocks on demand. This paper, by contrast, focuses on
the impact on supply. We show that risk premium shocks reduce the output level that
maximizes profit. They also lead to unemployment surges, as firms are forced to cut
costs when financing becomes expensive or is no longer available. As a result, all
countries with risk premium shocks saw unemployment surge, even as euro area core
countries managed to contain unemployment as firms hoarded labor during the
downturn. Most striking, wage bills in euro area crisis countries and the Baltics
declined even faster than GDP, whereas in core euro area countries wage shares
Mr. Ashvin Ahuja, Kevin Wiseman, and Mr. Murtaza H Syed
Assessing country risk is a core component of surveillance at the IMF. It is conducted through a comprehensive architecture, covering both bilateral and multilateral dimensions. This note describes some of the approaches used internally by Fund staff to examine a wide array of systemic risks across advanced, emerging, and low-income economies. It provides a high-level view of the theory and methodologies employed, with an on-line companion guide providing more technical details of implementation. The guide will be updated as Fund staff’s methodologies for assessing country risk continue to evolve with experience and feedback. While the results of these approaches are not published by the IMF for market sensitivity reasons, they inform risk assessments featured in bilateral surveillance as well as in the IMF’s flagship publications on global surveillance.
This paper examines the recent behavior of core inflation in the United States. We specify a simple Phillips curve based on the assumptions that inflation expectations are fully anchored at the Federal Reserve’s target, and that labor-market slack is captured by the level of shortterm unemployment. This equation explains inflation behavior since 2000, including the failure of high total unemployment since 2008 to reduce inflation greatly. The fit of our equation is especially good when we measure core inflation with the Cleveland Fed’s series on weighted median inflation. We also propose a more general Phillips curve in which core inflation depends on short-term unemployment and on expected inflation as measured by the Survey of Professional Forecasters. This specification fits U.S. inflation since 1985, including both the anchored-expectations period of the 2000s and the preceding period when expectations were determined by past levels of inflation.
Laurence M. Ball, João Tovar Jalles, and Mr. Prakash Loungani
This paper provides an assessment of the consistency of unemployment and output forecasts. We show that, consistent with Okun’s Law, forecasts of real GDP growth and the change in unemployment are negatively correlated. The Okun coefficient—the responsiveness of unemployment to growth—from forecasts is fairly similar to that in the data for various countries. Furthermore, revisions to unemployment forecasts are negatively correlated with revisions to real GDP forecasts. These results are based on forecasts taken from Consensus Economics for nine advanced countries since 1989.
Notwithstanding persistently-high unemployment following the Great Recession, inflation in the United States has been remarkably stable. We find that a traditional Phillips curve describes the behavior of inflation reasonably well since the 1960s. Using a non-linear Kalman filter that allows for time-varying parameters, we find that three factors have contributed to the observed stability of inflation: inflation expectations have become better anchored and to a lower level; the slope of the Phillips curve has flattened; and the importance of import-price inflation has increased.
Ms. Natalia T. Tamirisa, Mr. Prakash Loungani, and Mr. Herman O. Stekler
We document information rigidity in forecasts for real GDP growth in 46 countries over the past two decades. We investigate: (i) if rigidities are lower around turning points in the economy, such as in times of recessions and crises; (ii) if rigidities differ across countries, particularly between advanced countries and emerging markets; and (iii) how quickly forecasters incorporate news about growth in other countries into their growth forecasts, with a focus on how advanced countries‘ growth forecasts incorporate news about emerging market growth and vice versa.
Mr. Axel Schimmelpfennig, Nouriel Roubini, and Paolo Manasse
We develop an early-warning model of sovereign debt crises. A country is defined to be in a debt crisis if it is classified as being in default by Standard & Poor's, or if it has access to nonconcessional IMF financing in excess of 100 percent of quota. By means of logit and binary recursive tree analysis, we identify macroeconomic variables reflecting solvency and liquidity factors that predict a debt-crisis episode one year in advance. The logit model predicts 74 percent of all crises entries while sending few false alarms, and the recursive tree 89 percent while sending more false alarms.