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Valentina Flamini, Pierluigi Bologna, Fabio Di Vittorio, and Rasool Zandvakil
Credit is key to support healthy and sustainable economic growth but excess aggregate credit growth can signal the build-up of imbalances and lead to systemic financial crisis. Hence, monitoring the credit cycle is key to identifying vulnerabilities, particularly in emerging markets, which tend to be more exposed to sudden external shocks and reversal in capital flows. We estimate the credit cycle in Central America, Panama, and the Dominican Republic and find that the creadit gap is a powerful predictor of systemic vulnerability in the region. We simulate the activation of the Basel III countercyclical capital buffers and discuss the macroprudential policy implications of the results, arguing that countercyclical macroprudential policies based on the credit gap could prove useful to enhance the resilience of the region’s financial sector but the activation of macroprudential instruments should also be informed by the development of other macrofinancial variables and by expert judgment.
Mr. Geoffrey J Bannister, Mr. Jarkko Turunen, and Malin Gardberg
Despite significant strides in financial development over the past decades, financial dollarization, as reflected in elevated shares of foreign currency deposits and credit in the banking system, remains common in developing economies. We study the impact of financial dollarization, differentiating across foreign currency deposits and credit on financial depth, access and efficiency for a large sample of emerging market and developing countries over the past two decades. Panel regressions estimated using system GMM show that deposit dollarization has a negative impact on financial deepening on average. This negative impact is dampened in cases with past periods of high inflation. There is also some evidence that dollarization hampers financial efficiency. The results suggest that policy efforts to reduce dollarization can spur faster and safer financial development.
International Monetary Fund. Western Hemisphere Dept.
This 2017 Article IV Consultation highlights Nicaragua’s robust macroeconomic performance in 2016. Real GDP grew by 4.7 percent in 2016, supported by strong domestic demand, while inflation remained subdued at 3.1 percent as of the end of 2016, owing largely to the contribution of food prices. The current account deficit for 2016 is estimated to have narrowed to 8.6 percent of GDP, compared with 9 percent in 2015. This consolidation is largely explained by maquila exports, which have been better captured owing to improvements in statistical compilation. The current account deficit remained financed by foreign direct investment and other long-term inflows.
Ms. Corinne C Delechat, Ms. Camila Henao Arbelaez, Ms. Priscilla S Muthoora, and Svetlana Vtyurina
Banks’ liquidity holdings are comfortably above legal or prudential requirements in most Central American countries. While good for financial stability, high systemic liquidity may nonetheless hinder monetary policy transmission and financial markets development. Using a panel of about 100 commercial banks from the region, we find that the demand for precautionary liquidity buffers is associated with measures of bank size, profitability, capitalization, and financial development. Deposit dollarization is also associated with higher liquidity, reinforcing the monetary policy and market development challenges in highly dollarized economies. Improvements in supervision and measures to promote dedollarization, including developing local currency capital markets, would help enhance financial systems’ efficiency and promote intermediation in the region.
International Monetary Fund
This paper puts forward a package of proposed decisions to implement the Multilateral Debt Relief Initiative (“MDRI”) and establish the Exogenous Shocks Facility within the PRGF Trust; it also provides a Commentary on key aspects of the decisions. The proposed decisions generally reflect the overall structure and modalities that have been identified by the staff and endorsed by Executive Directors in the several meetings held to date concerning the G-8 debt relief proposal/MDRI and ESF.
International Monetary Fund
The paper presents statistical data on comparative social indicators, selected economic indicators, selected national accounts aggregates, summary expenditure and savings, summary consumer price indices, summary operations of the combined public sector, and summary of central government operations of Guatemala. The data on real gross domestic expenditure, labor productivity indicators, trends in unit labor costs, real wages, productivity, and employment, nonfinancial public sector operations, summary accounts of the financial system, detailed balance of payments, and imports by origin, and related economic indices are also presented.
International Monetary Fund
This paper reviews economic developments in Nicaragua during 1990–96. During 1990–95, Nicaragua made substantial progress in policy implementation to reduce macroeconomic imbalances and to transform itself to a market-based economy. Fiscal and monetary policies were strengthened; most price controls were eliminated; and the foreign exchange and trade systems were liberalized. A program of public asset divestment was implemented and public employment and military outlays were cut substantially. An extensive reform of the banking system was initiated by allowing private sector participation in financial intermediation; interest rates were liberalized; and banking supervision was established.
International Monetary Fund. Research Dept.
This paper discusses that the need for financing accounts and for integrated income and financing accounts is to be found in the fact that the income accounts are deficient in two respects as a source of data on the variables in the Keynesian analysis. Investment as measured in the income accounts is not a wholly satisfactory measure of the investment variable of income analysis; and the income accounts omit entirely data on money and other financial assets, which are variables that play roles in the income analysis as necessary as those of saving and investment. The need for financing accounts is the need to measure the strategic variable, money, and to provide data on other financial assets in a form in which the causes and effects of changes in the economy’s preferences for money and other types of financial asset can be analyzed.
International Monetary Fund. Research Dept.
This paper explores wage-price link in a prolonged inflation. A fixed tie between wages and prices must have significant effects in any economy. A wage-price link of the type discussed in this paper assumes that wages will be adjusted for any rise in consumer prices, subject to certain safeguards. This will protect wage earners against any significant fall in real wages arising from investment inflation. For a free economy, in which economic adjustments are induced by changes in prices and wages, the imposition of the degree of rigidity implied by this association is of far-reaching importance. in several countries, the use of wage-price links is a consequence of the fear of labor that real wages will be adversely affected by inflation. Although the basic causes of inflation vary widely in different countries and at different times, the process of inflation always shows similar characteristics. In an economy which is functioning properly, the distribution and use of the gross national product should result in an aggregate demand for goods and services that tend to equal the available supply of goods and services at approximately stable prices.