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Anna Ter-Martirosyan, Ms. Sally Chen, Mr. Lawrence Dwight, Ms. Mwanza Nkusu, Mr. Mehdi Raissi, and Ms. Ashleigh Watson
External Assessments in Special Cases presents the pilot External Balances Assessment methodology developed by IMF staff for estimating current account and exchange rate gaps for a group of advanced and emerging market economies, and discusses modifications to take account of special cases. Different approaches to external assessments for countries with special circumstances are evaluated, and some tools presented that could be used to inform sound judgment on the part of those conducting such assessments.
Mr. Luca A Ricci, Mr. Jonathan David Ostry, Mr. Jaewoo Lee, Mr. Alessandro Prati, and Mr. Gian M Milesi-Ferretti

Abstract

The rapid increase in international trade and financial integration over the past decade and the growing importance of emerging markets in world trade and GDP have inspired the IMF to place stronger emphasis on multilateral surveillance, macro-financial linkages, and the implications of globalization. The IMF's Consultative Group on Exchange Rate Issues (CGER)--formed in the mid-1990s to provide exchange rate assessments for a number of advanced economies from a multilateral perspective--has therefore broadened its mandate to cover both key advanced economies and major emerging market economies. This Occasional Paper summarizes the methodologies that underpin the expanded analysis.

Mr. Luca A Ricci, Mr. Jonathan David Ostry, Mr. Jaewoo Lee, Mr. Alessandro Prati, and Mr. Gian M Milesi-Ferretti

Abstract

Exchange rate surveillance has always been at the core of the IMF’s responsibilities. Throughout its existence, the Fund has striven to strengthen its framework for assessing exchange rates, adapting it to underlying macroeconomic and financial developments in member countries. As part of this mandate, since the mid-1990s the IMF Consultative Group on Exchange Rate Issues (CGER) has provided exchange rate assessments for a number of advanced economies from a multilateral perspective, with the aim of informing the country-specific analysis of the IMF’s Article IV staff reports and fostering multilateral consistency. These assessments are additional tools at the disposal of the IMF staff country desks, which are responsible for formulating exchange rate assessments as part of the Fund’s bilateral surveillance, another of the IMF’s core responsibilities.

International Monetary Fund. Independent Evaluation Office

Abstract

The Independent Evaluation Office (IEO) was established by the IMF’s Executive Board in 2001. It provides objective and independent evaluation of issues related to the IMF. The IEO operates independently of IMF management and at arm’s length from the IMF Executive Board. For more information on the IEO’s activities, visit the IEO website: www.ieo-imf.org.

Mr. Luca A Ricci, Mr. Jonathan David Ostry, Mr. Jaewoo Lee, Mr. Alessandro Prati, and Mr. Gian M Milesi-Ferretti

Abstract

The macroeconomic balance approach to exchange rate assessments consists of three steps. First, an equilibrium relationship between current account balances and a set of fundamentals is estimated with panel econometric techniques. Second, for each country, equilibrium current accounts (“current account norms”) are computed from this relationship as a function of the levels of fundamentals projected to prevail in the medium term. Third, the real exchange rate adjustment that would close the gap between the estimated current account norm and the underlying current account balance (i.e., the current account balance that would emerge at a zero output gap both domestically and in partner countries) is computed for each country.

Mr. Luca A Ricci, Mr. Jonathan David Ostry, Mr. Jaewoo Lee, Mr. Alessandro Prati, and Mr. Gian M Milesi-Ferretti

Abstract

The reduced-form equilibrium real exchange rate (ERER) approach to exchange rate assessment consists of three steps. First, panel regression techniques are used to estimate an equilibrium relationship between real exchange rates and a set of fundamentals. Second, equilibrium real exchange rates are computed as a function of the medium-term level of the fundamentals. Third, the magnitude of the exchange rate adjustment that would restore equilibrium is calculated directly as the difference between each country’s actual real exchange rate and the equilibrium value identified in the second step.

Ellen Gaston and Mr. In W Song
Countries implementing International Financial Reporting Standards (IFRS) for loan loss provisioning by banks have been guided by two different approaches: International Accounting Standards (IAS) 39 and Basel standards. This paper discusses the different accounting and regulatory approaches in loan loss provisioning, and the challenges supervisors face when there are different perspectives and lack of guidance from IFRS. It suggests actions that supervisors can take to help banks meet regulatory and capital requirements and, at the same time, comply with accounting principles.
Ellen Gaston and Mr. In W Song
Countries implementing International Financial Reporting Standards (IFRS) for loan loss provisioning by banks have been guided by two different approaches: International Accounting Standards (IAS) 39 and Basel standards. This paper discusses the different accounting and regulatory approaches in loan loss provisioning, and the challenges supervisors face when there are different perspectives and lack of guidance from IFRS. It suggests actions that supervisors can take to help banks meet regulatory and capital requirements and, at the same time, comply with accounting principles.
Mr. Andreas A. Jobst, Li Lian Ong, and Mr. Christian Schmieder
Bank liquidity stress testing, which has become de rigueur following the costly lessons of the global financial crisis, remains underdeveloped compared to solvency stress testing. The ability to adequately identify, model and assess the impact of liquidity shocks, which are infrequent but can have a severe impact on affected banks and financial systems, is complicated not only by data limitations but also by interactions among multiple factors. This paper provides a conceptual overview of liquidity stress testing approaches for banks and discusses their implementation by IMF staff in the Financial Sector Assessment Program (FSAP) for countries with systemically important financial sectors over the last six years.
Mr. Luca A Ricci, Mr. Jonathan David Ostry, Mr. Jaewoo Lee, Mr. Alessandro Prati, and Mr. Gian M Milesi-Ferretti

Abstract

The external sustainability (ES) approach, not previously used in Consultative Group on Exchange Rate Issues (CGER) assessments, complements the two other methodologies by focusing on the relationship between the sustainability of a country’s external stock position and its flow current account position, trade balance, and real exchange rate. It consists of three steps. The first involves determining the ratios of trade or current account balance to GDP that would stabilize the net foreign asset position at given “benchmark” values. The second step compares these NFA-stabilizing trade or current account balances with the level of a country’s trade or current account balance expected to prevail over the medium term. And, finally, the third step consists of assessing the adjustment in the real effective exchange rate that is needed to close the gap between the medium-term trade and current account balances and the NFA-stabilizing trade and current account balances.