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Ms. Ritu Basu, Mr. Ananthakrishnan Prasad, and Mr. Sergio L. Rodriguez
The assessment provides evidence of market segmentation across Islamic and conventional banks in the Gulf Cooperation Council (GCC), leading to excess liquidity, and an uneven playing field for Islamic banks that might affect their growth. Liquidiy management has been a long-standing concern in the global Islamic finance industry as there is a general lack of Shari’ah compliant instruments than can serve as high-quality short-term liquid assets. The degree of segmentation and bank behavior varies across countries depending on Shari’ah permissibility and the availability of Shari’ah-compliant instruments. A partial response would be to support efforts to build Islamic liquid interbank and money markets, which are crucial for monetary policy transmission through the Islamic financial system.This can be achieved, to a large extent, by deepening Islamic government securities and developing Shari’ah-compliant money market instruments.
Mr. Ananthakrishnan Prasad, Heba Abdel Monem, and Pilar Garcia Martinez
Several characteristics of the structure of the Arab economies, their economic policy framework, and their banking systems make macroprudential policy a particular relevant tool. For most oil exporters, heavy reliance on the extractive sector for generating fiscal revenues and export earnings translates into increased vulnerabilities to oil price shocks. In the case of oil importers, relatively small external and fiscal buffers make them highly vulnerable to shocks. This paper discusses the experience of Arab countries in implementing macroprudential policies and contains recommendations to strengthen their macroprudential framework.
Ms. Zsofia Arvai, Mr. Ananthakrishnan Prasad, and Mr. Kentaro Katayama
As undiversified commodity exporters, GCC economies are prone to pro-cyclical systemic risk in the financial system. During periods of high hydrocarbon prices, favorable economic prospects make the financial sector keen to lend, leading to higher domestic credit growth and easier access to external financing. Fiscal policy is a very important tool for macroeconomic management, but due to the significant time lags and expenditure rigidities, it has not been a flexible enough tool to prevent credit booms and the build-up of systemic risk in the GCC. This, together with limited monetary policy independence because of the pegged exchange rate, means that macro-prudential policy has a particularly important role in limiting systemic risk in the financial system. This importance is reinforced by the underdeveloped financial markets in the region that provide limited risk management tools and shortcomings in crisis resolution frameworks. This paper will discuss the importance of macro-prudential policy in the GCC countries, look at the experience with macro-prudential policies in the boom/bust cycle in the second half of the 2000s, and use the broad frameworks being developed in the Fund and elsewhere to discuss ways existing frameworks and policy toolkits in the region can be strengthened given the characteristics of the GCC economies.