Annex 3. Medium-Term Analysis Through Risk Assessments and Scenarios

International Monetary Fund. Independent Evaluation Office
Published Date:
April 2014
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Several IMF products potentially contain discussions about future developments over horizons longer than a year. This annex briefly describes how medium-term issues are treated in the flagship publications World Economic Outlook (WEO), Global Financial Stability Report (GFSR), and Fiscal Monitor, as well as in spillover reports, pilot external sector reports, early warning exercises, and vulnerability exercises.

The WEO “presents IMF staff economists’ analyses of global economic developments during the near and medium term” [emphasis added].1 The medium-term issues referred to, which occasionally are treated in special chapters, include the effects of the evolution of commodity prices and structural reforms; fiscal projections; and sustainable rates of economic growth.

The GFSR provides a quarterly assessment of global financial markets, with a view towards emerging market financing in a global context. The GFSR focuses on current conditions and contemporary issues, but discusses financial imbalances and structural deficiencies that could pose risks to financial stability and market access by emerging market borrowers that extends to the medium term. In particular, the Report draws out the financial implications of economic imbalances highlighted in the WEO, including on medium-term projections, to assess current risks. The GFSR often also contains articles and analytical chapters on structural or systemic issues that are of longer-term nature.

The Fiscal Monitor focuses on the multilateral surveillance of fiscal developments, analyzing the latest public finance developments, information on fiscal implications of the crisis and medium-term fiscal projections, and assessing policies to put public finances on a sustainable footing. The Fiscal Monitor’s projections—including the medium-term fiscal projections that incorporate policy measures judged by the IMF staff as likely to be implemented, IMF program projections, and estimates of cyclically adjusted primary balances—are based on the same database used for the WEO and GFSR.

Table A3.1 quantifies the frequency of discussions about medium-term developments in flagship publications—as measured by the number of separate sections that explicitly deal with medium-term issues—and the use of scenarios and fan charts to describe such medium-term developments.

Table A3.1.Medium-Term Analysis in IMF Products
IMF ProductNumber of ReportsReports with Fan ChartsFan Charts per Report (Average)Reports with Figures or Tables of Medium-Term ScenariosFigures or Tables of Scenarios per Report (Average)Reports with Sections About Medium-Term Issues1Sections About Medium-Term Issues per Report (Average)
World Economic Outlook2857%0.7193%2.8264%1.32
Fiscal Monitor21020%0.3060%1.0060%1.40
Global Financial Stability Report268%0.0819%0.1919%0.27
Article IV consultation reports3564%0.0496%4.5584%1.29
World Economic Outlook16100%1.2594%2.6950%0.94
Fiscal Monitor21020%0.3060%1.0060%1.40
Global Financial Stability Report1613%0.1331%0.3113%0.13

Based on search for selected key phrases on section titles.

The Fiscal Monitor first appeared in 2009.

Latest reports for 56 randomly selected countries.

Based on search for selected key phrases on section titles.

The Fiscal Monitor first appeared in 2009.

Latest reports for 56 randomly selected countries.

Among the 28 editions of the WEO published since the year 2000, almost two-thirds have sections or chapters with titles containing key phrases that suggest medium/long-term subjects;2 57 percent use fan charts to describe the uncertainty around medium-term central forecasts, and 93 percent contain figures, charts, or tables to describe medium-term scenarios.

Compared to the WEO, the discussion of medium-term issues is slightly more frequent in the Fiscal Monitor (60 percent versus 50 percent during the 2006–13 period)—where it is mostly restricted to fiscal issues, and the use of fan charts and tables/figures for medium-term scenarios is substantially less frequent than in the WEO.

Among the flagship products, the GFSR seems to be the least concerned with medium-term issues and scenarios.

Even if medium-term issues are not the central part in the Fiscal Monitor and GFSR they often feature in the overall analysis. For instance, simple inspection (page counting) of recent editions of the Fiscal Monitor and GFSR reveals that between 60 percent and 70 percent of these documents deal, at least partly, with structural issues and medium- to long-term trends, prospects, or risks.

Spillover reports examine the external effects of domestic policies in five systemic economies: China, the euro area, Japan, the United Kingdom, and the United States. The reports aim to complement Article IV -discussions with these economies and serve as an input into the Fund’s multilateral surveillance, by analyzing the transmission channels of monetary, exchange rate, fiscal, financial, and structural policies between the five systemic economies and the global economy with a view to anticipating the cross-border impact of policies. The identification and assessment of policy spillovers with the greatest potential impact—based on staff macro models, inputs from a multi-departmental team, and individual discussions with authorities—also complements the debate on the risks to global economic and financial stability in the WEO and GFSR, and points to possible areas for policy coordination.

Also discussed in spillover reports are medium-term issues such as the potential impact of financial sector and structural reforms affecting potential growth, long-term fiscal measures, and monetary/exchange rate policies or frameworks. Table A.3.2 lists all specific examples of discussions involving medium-term projections in the three issues of the spillover report, which often include fan charts to provide a sense of risks around the expected path (central forecast) of relevant variables or figures and tables with alternative scenarios. Note that the number of explicit quantitative analyses of developments over the medium term in the reports has increased every year.

Table A3.2.Medium-Term Analysis in Spillover Reports
2011The cumulative effects of planned fiscal adjustments in major economies (euro area, Japan, United States) on the output of other systemic economies over next five years.

The medium-term impact of an appreciation of the Chinese exchange rate on the GDP of other economies.
2012The impact of the euro crisis on the fiscal space and reserve coverage needed to reach a desired target for the debt-to-GDP ratio in low-income countries.

The effect of a credible medium-term fiscal adjustment in the United States on the erosion in public confidence.

The cumulative response of oil prices to shocks to global liquidity over next 20 quarters.

The effect of rebalancing the investment and consumption ratios in China on the GDP of other economies and on commodity prices.

Effects of an increase in Japanese bond yields on global yields and economic growth.
2013The long-run effect on the GDP of policies in the five systemic economies leading to a reduction in the risk of adverse spillovers to global economy.

Scenarios about the cumulative effect of quantitative easing announcements on GDP.

Structural reforms to increase potential output in the euro area and Japan, to reduce risks during the transition to a higher consumption-to-GDP ratio in China, and structural fiscal reform in the United States and Japan.

Positive net growth spillover effects from new monetary policy stance (“Abenomics) over the long run.

Cumulative impact over three years of a smooth normalization of monetary policy in the United States on GDP.

The effect of “rebalancing policies”—needed to reduce the imbalances of global current accounts and in domestic policies in the five systemic economies—on global GDP over 10 years.
Source: IMF Spillover Reports.
Source: IMF Spillover Reports.

The Early Warning Exercise (EWE)—which the IMF conducts jointly with the Financial Stability Board (FSB)—emerged from the need to improve the ability of multilateral surveillance to flag risks and vulnerabilities that could lead to systemic shocks, such as those leading to the recent financial crisis. The EWE focuses on low-probability but high-impact risks to the global economy and on policies to mitigate these risks, integrating macroeconomic and financial analyses and using a number of quantitative tools and broad-based consultations. No report is made available to the public; findings are confidentially presented to senior officials during the IMF Spring and Annual Meetings. The EWE typically contains less medium-term analysis than spillover reports, although the initial EWE rounds focused primarily on potential mutations of the 2007–09 financial crises, asking what new shocks could materialize and assessing the consequences of policy inaction over an unspecified horizon that may include the medium term. It is expected that, once the global economy returns to more stable conditions, the EWE will become more forward looking as initially planned.

The pilot External Sector Report (ESR) provides a snapshot of multilaterally consistent analysis of the external positions of 28 large economies and the euro area. It combines insights from IMF staff on individual economies with multilateral analysis about exchange rates, current accounts, balance sheet positions, reserves adequacy, and capital flows. One premise is that current account imbalances and deviations of exchange rates from a desired “norm” may be useful for the assessment of member countries’ overall economic and financial policies, to the extent that those gaps reflect the joint effects of policies targeted both at the domestic economy and the external sector as well as of structural factors.

Table A3.3.Medium-Term Analysis in Pilot External Sector Reports
2012Moving current accounts toward fundamentals likely implies ambitious medium-term policies and significant real exchange rate realignments.

Adjustments to structural factors are needed to reduce vulnerabilities to external imbalances (e.g., changes in social protection frameworks that affect precautionary savings).

Expected medium-term policy changes (as announced and discussed in the most recent WEO before publication of the 2012 ESR) are likely to produce only modest effects on the current account divergences over the next five years.

Differences in cyclically adjusted current account balances and current account balances consistent with fundamentals and desired policies are used as a measure of undesirable external imbalances. The estimation of cyclically adjusted variables requires estimates of the long-run sustainable output level (potential output).
2013Medium-term policies to close structural policy gaps and reduce undesired current account imbalances include fiscal consolidation over the medium term and structural reforms in deficit countries.

Discussion of risks of prolonged use of extraordinarily low interest rates and quantitative easing in the United States.

“Looking ahead” section analyses past data on the determinants of capital inflows, distinguishing between structural and temporary factors. Although the horizon is not specified the forward-looking analysis presumably involves longer horizons.
Source: IMF Pilot External Sector Reports.
Source: IMF Pilot External Sector Reports.

Like that in other IMF products, the analysis in the ESR mostly concentrates on the short-term assessment of policies rather than on projections of future outcomes. Nevertheless, assumptions about a country’s long-run sustainable output level and growth rate, sometimes embedded in point forecasts of GDP growth for the medium term, are required by the new pilot external balance assessment (EBA) approach, which is combined with judgment to help assess external imbalances.

Medium-term or structural issues have been discussed in the two issues of the ESR, in 2012 and 2013, despite their focus on short term. All specific topics analyzed are listed in Table A3.3.

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