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Thitipat Chansriniyom, Mr. Natan P. Epstein, and Valeriu Nalban
The paper extends a standard semi-structural model to account for nonlinear and asymmetric effects of monetary policy credibility. In our setting, central bank credibility is proportional to the deviation of inflation expectations from the announced inflation target, with positive deviations being more costly compared to negative ones. A loss in policy credibility as a result of shocks leads to a more persistent, backward-looking inflation process, and is associated with lower output. We find that the extended model with credibility effects matches well the key macroeconomic data over specific past episodes for Indonesia and Philippines and consider its adaptation to integrated policy frameworks as an area for further exploration.
Mr. David J Hofman, Mr. Marcos d Chamon, Mr. Pragyan Deb, Mr. Thomas Harjes, Umang Rawat, and Itaru Yamamoto
We investigate the motives inflation-targeting central banks in emerging markets may have for intervening in foreign exchange markets and evaluate the case for such interventions based on the existing literature. Our findings suggest that the rationale for interventions depends on initial conditions and country-specific circumstances. The case is strongest in the presence of large currency mismatches or underdeveloped markets. While interventions can have benefits in the short-term, sustained over time they could entrench unfavorable initial conditions, though more work is needed to establish this empirically. A first effort to measure the cost of interventions to the credibility of policy frameworks suggests that the negative impact may be smaller than often assumed—at least for the set of more sophisticated inflation-targeting emerging-market central banks considered here.
Vizhdan Boranova, Raju Huidrom, Sylwia Nowak, Petia Topalova, Mr. Volodymyr Tulin, and Richard Varghese
Wages have been rising faster than productivity in many European countries for the past few years, yet signs of underlying consumer price pressures remain limited. To shed light on this puzzle, this paper examines the historical link between wage growth and inflation in Europe and factors that influence the strength of the passthrough from labor costs to prices. Historically, wage growth has led to higher inflation, but the impact has weakened since 2009. Empirical analysis suggests that the passthrough from wage growth to inflation is significantly lower in periods of subdued inflation and inflation expectations, greater competitive pressures, and robust corporate profitability. Thus the recent pickup in wage growth is likely to have a more muted impact on inflation than in the past.
International Monetary Fund. European Dept.


Economic activity in Europe has slowed on the back of weakness in trade and manufacturing. For most of the region, the slowdown remains externally driven. However, some signs of softer domestic demand have started to appear, especially in investment. Services and domestic consumption have been buoyant so far, but their resilience is tightly linked to labor market conditions, which, despite some easing, remain robust. Expansionary fiscal policy in many countries, and looser financial conditions, have also supported domestic demand. On balance, Europe’ s growth is projected to decline. A modest recovery is forecast for 2020 as global trade is expected to pick up and some economies recover from past stresses. This projection, broadly unchanged from the April 2019 World Economic Outlook, masks significant differences between advanced and emerging Europe. Growth in advanced Europe has been revised down, while growth in emerging Europe has been revised up. Amid high uncertainty, risks remain to the downside, with a no-deal Brexit the key risk in the near term. An intensification of trade tensions and related uncertainty could also dampen investment. More broadly, the weakness in trade and manufacturing could spread to other sectors—notably services—faster and to a greater extent than currently envisaged. Other risks stem from abrupt declines in risk appetite, financial vulnerabilities, the re-emergence of deflationary pressures in advanced economies, and geopolitics.

International Monetary Fund. European Dept.

2018 Article IV Consultation-Press Release and Staff Report