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International Monetary Fund. Strategy, Policy, & Review Department
The coverage of risks has become more systematic since the Global Financial Crisis (GFC): staff reports now regularly identify major risks and provide an assessment of their likelihood and economic impact, summarized in Risk Assessment Matrices (RAM). But still limited attention is paid to the range of possible outcomes. Also, risk identification is useful only so much as to inform policy design to preemptively respond to relevant risks and/or better prepare for them. In this regard, policy recommendations in surveillance could be richer in considering various risk management approaches. To this end, progress is needed on two dimensions: • Increasing emphasis on the range of potential outcomes to improve policy design. • Encouraging more proactive policy advice on how to manage risks. Efforts should continue to leverage internal and external resources to support risk analysis and advice in surveillance.
Mr. David Coady, Ian Parry, Nghia-Piotr Le, and Baoping Shang
This paper updates estimates of fossil fuel subsidies, defined as fuel consumption times the gap between existing and efficient prices (i.e., prices warranted by supply costs, environmental costs, and revenue considerations), for 191 countries. Globally, subsidies remained large at $4.7 trillion (6.3 percent of global GDP) in 2015 and are projected at $5.2 trillion (6.5 percent of GDP) in 2017. The largest subsidizers in 2015 were China ($1.4 trillion), United States ($649 billion), Russia ($551 billion), European Union ($289 billion), and India ($209 billion). About three quarters of global subsidies are due to domestic factors—energy pricing reform thus remains largely in countries’ own national interest—while coal and petroleum together account for 85 percent of global subsidies. Efficient fossil fuel pricing in 2015 would have lowered global carbon emissions by 28 percent and fossil fuel air pollution deaths by 46 percent, and increased government revenue by 3.8 percent of GDP.
Mr. Rabah Arezki and Mr. Akito Matsumoto

Abstract

A survey of the complex and intertwined set of forces behind the various commodity markets and the interplay between these markets and the global economy. Summarizes a rich set of facts combined with in-depth analyses distillated in a nontechnical manner. Includes discussion of structural trends behind commodities markets, their future implications, and policy implications.

International Monetary Fund
The Fund has a role to play in helping its members address those challenges of climate change for which fiscal and macroeconomic policies are an important component of the appropriate policy response. The greenhouse gas mitigation pledges submitted by over 160 countries ahead of the pivotal Climate Conference in Paris in December represent an important step by the international community towards containing the extent of global warming. Strategies for reducing emissions will reflect countries’ differing initial positions, political constraints and circumstances. Carbon pricing can, however, play a critical role in meeting in the most efficient and effective way the commitments that countries are now entering into; it can also raise substantial revenues that can be used to reduce other, more distorting taxes. Through its incentive effects, carbon pricing will also help mobilize private finance for mitigation activities and spur the innovation needed to address climate challenges. Finance ministries have a key role to play in promoting and implementing these policies and ensuring efficient use of the revenue raised. The process of climate change is set to have a significant economic impact on many countries, with a large number of lower income countries being particularly at risk. Macroeconomic policies in these countries will need to be calibrated to accommodate more frequent weather shocks, including by building policy space to respond to shocks; infrastructure will need to be upgraded to enhance economic resilience. It will be important that developing countries seeking to make these adaptations have access to sufficient financial support on generous terms. Financial markets will play an important role in helping economic agents and governments in coping with climate change-induced shocks. And heightened climate vulnerabilities and the structural adjustments associated with a shift towards a low-carbon economy over the medium-term will have important implications for financial institutions and financial stability. This paper identifies areas in which the Fund has a contribution to make in supporting its members deal with the macroeconomic challenges of climate change, consistent with national circumstances. It draws on materials contained in a forthcoming Staff Discussion Note (Farid et al. 2015) and has benefited from the discussions at informal Board meetings on IMF work on climate change held on September 30 and November 24, 2015.
Philip Daniel, Mr. Sanjeev Gupta, Mr. Todd D. Mattina, and Mr. Alex Segura-Ubiergo

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

Mr. Alessandro Prati, Mr. Luca A Ricci, Lone Engbo Christiansen, Mr. Stephen Tokarick, and Mr. Thierry Tressel

Abstract

Assessments of exchange rate misalignments and external imbalances for low-income countries are challenging because methodologies developed for advanced and emerging economies cannot be automatically applied to poorer nations. This paper uses a large database, unique in the set of indicators and number of countries it covers, to estimate the relationship in low-income countries between a set of fundamentals in the medium to long term and the real effective exchange rate, the current account, and the net external assets position.

Ali Alichi and Mr. Rabah Arezki
The paper provides an alternative explanation for the "resource curse" based on the income effect resulting from high government current spending in resource rich economies. Using a simple life cycle framework, we show that private investment in the non-resource sector is adversely affected if private agents expect extra government current spending financed through resource sector revenues in the future. This income channel of the resource curse is stronger for countries with lower degrees of openness and forward altruism. We empirically validate these findings by estimating non-hydrocarbon sector growth regressions using a panel of 25 oil-exporting countries over 1992-2005.