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Business and Economics > Finance: General

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Cover IMF Working Papers
Europe’s Shift to EVs Amid Intensifying Global Competition
Philippe Wingender
,
Jiaxiong Yao
,
Robert Zymek
,
Benjamin Carton
,
Diego A. Cerdeiro
, and
Anke Weber
European countries have set ambitious goals to reduce their carbon emissions. These goals include a transition to electric vehicles (EVs)—a sector that China increasingly dominates globally—which could reduce the demand for Europe’s large and interconnected auto sector. This paper aims to size up the tradeoffs between Europe’s shift towards EVs and key macroeconomic outcomes, and analyze which policies may sharpen or ease them. Using state-of-the-art macroeconomic and trade models we analyze a scenario in which the share of Chinese cars in EU purchases rises by 15 percent over 5 years as a result of both a positive productivity shock for car production in China and a demand shock that shifts consumer preferences towards Chinese cars (given China’s dominance in the EV sector). We find that for the EU as a whole, the GDP cost of this shift is small in the short term, in the range of 0.2-0.3 percent of GDP, and close to zero over the long term. Adverse short-run effects are more significant for smaller economies heavily reliant on the car sector, mainly in Central Europe. Protectionist policies, such as tariffs on Chinese EVs, would raise the GDP cost of the EV transition. A further increase in Chinese FDI inflows that results in a significant share of Chinese EVs being produced in Central European economies, on the other hand, would offset losses in these economies by supporting their shift from supplying the internal combustion engine (ICE) production chain to that of EVs.
Keywords:
Electric vehicles; green transition; trade; tariffs; global value chains.; protectionist policy response; GDP cost; EV share; Europe's shift; shift to electric vehicles; Foreign direct investment; Productivity; Imports; Europe; Global
Cover Regional Economic Outlook, Europe, November 2023
Regional Economic Outlook, Europe, November 2023
Restoring Price Stability and Securing Strong and Green Growth
International Monetary Fund. European Dept.

Abstract

Europe is at a turning point. After last year’s crippling energy price shock caused by Russia’s invasion of Ukraine, Europe faces the difficult task of restoring price stability now while securing strong and green growth in the medium term. Economic activity has started to cool and inflation to fall as a result of monetary policy action, phasing-out supply shocks, and falling energy prices. Sustained wage growth could, however, delay achieving price stability by 2025. Failing to tackle inflation now will risk additional growth damage in a world exposed to structural shocks from fragmentation and climate change. These global headwinds add to Europe’s long-standing productivity and convergence problems. To lift Europe’s potential for strong and green growth, countries need to remove obstacles to economic dynamism and upgrade infrastructure. This will strengthen business-friendly conditions and investment. Cooperation at the European level and with international partners will position Europe as a leader in the climate transition and support economic stability across the continent.

Keywords:
inflation; growth; monetary policy; labor; headline inflation; core inflation; coverage ratio; IMF staff calculation; inflation expectation; capitalization rate; Emerging and frontier financial markets; Central bank policy rate; Energy prices; Labor markets; Europe; Global
Cover IMF Working Papers
ECB Euro Liquidity Lines
Silvia Albrizio
,
Iván Kataryniuk
,
Luis Molina
, and
Jan Schäfer
Central bank liquidity lines have gained momentum since the global financial crisis as a crosscurrency liquidity management tool. We provide a complete timeline of the ECB liquidity line announcements and study their signalling and spillback effects. The announcement of an ECB euro liquidity line decreases the premium paid by foreign agents to borrow euros in FX markets relative to currencies not covered by these facilities by 51 basis points. Consistent with a stylized model, bank equity prices increase by around 1.75% in euro area countries highly exposed via banking linkages to countries whose currencies are targeted by liquidity lines.
Keywords:
liquidity facilities; central bank swap and repo lines; spillbacks.; ECB liquidity line announcement; ECB Euro liquidity line; cross-currency liquidity management tool; central bank liquidity line; Liquidity; Currencies; Currency markets; Currency swaps; Asset prices; Global
Cover Selected Issues Papers
Hungarian Monetary Policy Operations Before, During, and After the Pandemic: Hungary
Mr. Tonny Lybek
Within its inflation-targeting framework, the Magyar Nemzeti Bank (MNB) has frequently adjusted its monetary operations. This has raised questions about their internal consistency, appropriateness, and effectiveness. A broader assessment, implying a comparison to a counterfactual, is outside the scope of this paper. Our prior is agnostic. We find that the changes were generally well-motivated within the MNB statutory powers; prioritized, transparently explained, and monitored; and promptly adjusted, when they no longer served their purpose. Occasionally, some tools have worked at cross purposes. Government policies have at times hampered monetary policy. Simplicity comes with a premium, as complexity can blur signals.
Keywords:
Hungarian monetary operations; unconventional monetary instruments; MNB asset purchase program; MNB balance sheet; monetary policy stance; monetary policy operation; inflation-targeting framework; Monetary operations; Inflation; Liquidity; Mortgages; Central bank policy rate; Global
Cover IMF Staff Country Reports
Hungary: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper examines how and why Hungary reached historically high inflation. Particular attention is placed on cross-country comparisons to understand where Hungary may stand out, and on domestic drivers that could help explain stronger inflationary pressure in Hungary. Following an overview of inflation developments over the last two years, the paper draws on an augmented Phillips Curve to estimate the impact of common drivers of inflation, examines the role of labor market tightness and policy stances, and analyzes possible changes to the degree of exchange rate pass through in recent years. Based on the findings, the paper then explores risks to the inflation outlook and draws policy recommendations. Though monetary and fiscal policies are now tightening, inflation expectations are de-anchored and core inflation dynamics remain strong, reflecting a tight labor market and the lag-effect of loose policies that have boosted domestic demand. Going forward, a consistently and persistently tight overall policy mix is needed to drive inflation back to the central bank’s target.
Keywords:
food inflation; policy stance indicator; B. inflation driver; monetary policy stance; producer price inflation; inflation in Hungary; Inflation; Monetary operations; Liquidity; Central bank policy rate; Mortgages; Europe; Global
Cover IMF Working Papers
Supporting Sustainable Financing and Access to Finance in Armenia
Maria Atamanchuk
and
Kiichi Tokuoka
In Armenia, both external and domestic financing face challenges. Armenia’s share of inward foreign direct investment (FDI) in private external financing has declined significantly over the past decade. Access to domestic finance in Armenia is also moderate and masks important disparities. Against this background, this paper analyses the determinants of inward FDI and examines the impediments to increasing access to domestic finance. The paper confirms empirically that governance-related structural factors have a significant impact on inward FDI. Similar structural factors, informality and poor accounting practices are reported among major challenges for increasing access to finance for firms in Armenia. This paper finds that to improve financing in Armenia include: implementing structural reforms to improve the business environment, maintaining prudent macroeconomic policies, strengthening financial reporting, and improving financial inclusion through reduced informality in the economy.
Keywords:
Inward FDI; access to finance; financial inclusion; face challenge; sustainable financing; inward foreign direct investment; financing in Armenia; Armenia's share; Foreign direct investment; Business environment; Capital inflows; Loans; Global; Europe; Middle East and Central Asia
Cover IMF Working Papers
Uzbekistan’s Transition to Inflation Targeting
Moayad Al Rasasi
and
Ezequiel Cabezon
Uzbekistan has significantly improved its monetary policy framework during 2017-21. Nevertheless, the transition to inflation targeting is challenging as the country is going through a period of deep structural reforms. Therefore, the Central Bank of Uzbekistan (CBU) will have to monitor structural reforms and calibrate monetary policy accordingly. This paper identifies institutional and structural gaps, and assesses the effectiveness of monetary policy transmission. Institutional gaps are assessed using institutional indexes while transmission is assessed using VARs. It concludes that in the coming years, reforms will need to continue, to further improve the CBU’s governance and independence, develop financial markets, but most of all to reduce the still large footprint of the state in the financial sector as well as in the overall economy.
Keywords:
Uzbekistan; Inflation targeting; Monetary policy; post inflation targeting implementation; monetary policy outcome; monetary policy transmission; inflation targeting condition; transition to inflation targeting; transmission mechanism; Central bank policy rate; Inflation; Dollarization; Currency markets; Global; Central Asia and the Caucasus
Cover Global Financial Stability Notes
Multi-Sector Bond Funds in Emerging Markets—Easy Come, Easy Go
Fabio Cortes
and
Luca Sanfilippo
Unconstrained multi-sector bond funds (MSBFs) can be a source of spillovers to emerging markets and potentially exert a sizable impact on cross-border flows. MSBFs have grown their investment in emerging markets in recent years and are highly concentrated—both in their positions and their decision-making. They typically also exhibit opportunistic behavior much more so than other investment funds. Theoretically, their size, multisector mandate, and unconstrained nature allows MSBFs to be a source of financial stability in periods of wide-spread market turmoil while others sell at fire-sale prices. However, this note, building on the analysis of Cortes and Sanfilippo (2020) and incorporating data around the COVID-19 crisis, finds that MSBFs could have contributed to increase market stress in selected emerging markets. When faced with large investor redemptions during the crisis, our sample of MSBFs chose to rebalance their portfolios in a concentrated manner, raising a large proportion of cash in a few specific local currency bond markets. This may have contributed to exacerbating the relative underperformance of these local currency bond markets to broader emerging market indices.
Keywords:
multi-sector bond funds, emerging markets, cross-border flows, COVID-19; unconstrained multi-sector bond funds; emerging market market index; sample of MSBFs; spillovers to emerging markets; portfolio dynamics; Emerging and frontier financial markets; Currencies; Bonds; Income; Currency markets; Global
Cover Global Financial Stability Notes
Drivers of Emerging Market Bond Flows and Prices
Mr. Evan Papageorgiou
and
Rohit Goel
An interesting disconnect has taken shape between local currency- and hard currency-denominated bonds in emerging markets with respect to their portfolio flows and prices since the start of the recovery from the COVID-19 pandemic. Emerging market assets have recovered sharply from the COVID-19 sell-off in 2020, but the post-pandemic recovery in 2021 has been highly uneven. This note seeks to answer why. Yields of local currency-denominated bonds have risen faster and are approaching their pandemic highs, while hard currency bond yields are still near their post-pandemic lows. Portfolio flows to local currency debt have similarly lagged flows to hard currency bonds. This disconnect is closely linked to the external environment and fiscal and inflationary pressures. Its evolution remains a key consideration for policymakers and investors, since local markets are the main source of funding for emerging markets. This note draws from the methodology developed in earlier Global Financial Stability Reports on fundamentals-based asset valuation models for funding costs and forecasting models for capital flows (using the at-risk framework). The results are consistent across models, indicating that local currency assets are significantly more sensitive to domestic fundamentals while hard currency assets are dependent on the external risk sentiment to a greater extent. This suggests that the post-pandemic, stressed domestic fundamentals have weighed on local currency bonds, partially offsetting the boost from supportive global risk sentiment. The analysis also highlights the risks emerging markets face from an asynchronous recovery and weak domestic fundamentals.
Keywords:
emerging markets, bonds, COVID-19, at-risk framework; bond flow; hard currency assets; portfolio flow; emerging market assets; hard currency-denominated bond; hard currency bond; Emerging and frontier financial markets; Currencies; Bonds; Securities markets; Capital flows; Global
Cover Departmental Papers
Asset Purchase Programs in European Emerging Markets
Mr. Marco Arena
,
Mr. Rudolfs Bems
,
Mr. Nadeem Ilahi
,
Mr. Jaewoo Lee
,
William Lindquist
, and
Mr. Tonny Lybek
Several emerging market central banks in Europe deployed asset purchase programs (APPs) amid the 2020 pandemic. The common main goals were to address market dysfunction and impaired monetary transmission, distinct from the quantitative easing conducted by major advanced economy central banks. Likely reflecting the global nature of the crisis, these APPs defied the traditional emerging market concern of destabilizing the exchange rate or inflation expectations and instead alleviated markets successfully. We uncover some evidence that APPs in European emerging markets stabilized government bond markets and boosted equity prices, with no indication of exchange rate pressure. Examining global and domestic factors that could limit the usability of APPs, in the event of renewed market dysfunction we see a potential scope for scaling up APPs in most European emerging markets that used APPs during the pandemic, provided that they remain consistent with the primary objective of monetary policy and keep a safe distance from the risk of fiscal dominance. As central banks in the region move towards monetary policy tightening, the tapering, ending, and unwinding of APPs must also be carefully considered. Clear and transparent communication is critical at each step of the process, from the inception to the closure of APPs, particularly when a large shock hits and triggers a major policy shift.
Keywords:
Monetary policy; Emerging markets; COVID-19 pandemic; Europe; asset purchase programs; emerging market concern; IMF library; market dysfunction; emerging market central banks; Yield curve; Government securities; Sovereign bonds; Emerging and frontier financial markets; Central bank policy rate; Global