Climate Change

Building on previous analytical work on climate change, including its impact on fiscal accounts and on financial stability, the Fund is deepening its analysis and further integrating the implications of climate change into its core operations:

• Analytical work on climate change mitigation and adaptation has advanced on multiple fronts. For instance, the Board paper on Fiscal policies for Paris Climate Strategies provided country-level guidance on the role and design of fiscal policies for mitigation strategies, while Building Resilience in Developing Countries Vulnerable to Large Natural Disasters proposed a framework for developing comprehensive, multi-pronged disaster resilience strategies.

• Flagships are embedding climate change issues into multilateral surveillance. The Fall 2019 FM focused on the design of fiscal policies including carbon taxes and emission trading systems for climate mitigation at the domestic and international levels. The Fall 2019 GFSR covered climate issues in a chapter on sustainable finance, calling for developing standards, fostering disclosure and transparency, and promoting integration of sustainability considerations into investments and business decisions. The Spring 2020 GFSR will study how climate change risks are priced into financial assets, and an analysis on the macroeconomic implications of climate mitigation policies is planned for Fall 2020 or Spring 2021 WEO.

• The CSR features climate change as one of the salient trends that will impact growth and economic and financial stability. The 2020 FSAP Review is also looking into improvements in the coverage of climate risks to financial stability, including through strengthening climate-related stress tests.

• Work is ongoing on a how-to note on integrating climate change systematically into IMF surveillance within the Fund’s surveillance mandate. Staff will review Climate Change Policy Assessments (jointly conducted with the WB) to take stock and draw lessons from their application in pilot countries. Staff is also looking into the social impact of fuel subsidies and the potential productivity gains from large-scale green investments in advanced economies.

The Fund’s Work on Negative Interest Rates and “Lower-for-Longer”

The environment of very low, and in some cases, negative interest rates is posing significant challenges for policymakers, including questions over the extent to which interest rates can be cut further, and the prolonged period of low interest rates and its unintended consequences, such as search for yield, buildup of leverage, spillovers and distributional consequences. These challenges are inviting questions as to whether policymakers are sufficiently equipped to deal with the potential macro-financial stability risks.

Several studies have attempted to identify the underpinnings of the unusually low level of real interest rates. Demographics, low productivity, scarring from the global financial crisis, higher savings from emerging markets, and an outward shift in demand for safe assets are the most- cited causes, although there is no consensus on the precise weight of each factor. The hypothesis of a chronic lack of demand, or secular stagnation, has also gained traction in recent years as a motivating factor for structurally low interest rates. Developing a fuller understanding of these causes will be crucial for policymakers grappling to return to an environment where interest rates are sustainably and structurally higher than at the current juncture.

The Fund has produced an extensive body of work in these areas. A policy paper in 2013 surveyed the experience and prospects for unconventional monetary policy. The April 2014 WEO included an analysis of real interest rates, which concluded that there is a major common, global component to movements in domestic real interest rates. A 2017 paper looked at the experience of negative interest rates and assessed their usefulness. A clarification note on the statistical treatment of negative interest rates was also issued in 2017. Most recently, the Fall 2019 GFSR emphasized the medium-term risks to growth and stability due to accommodative conditions and the lower-for-longer interest rate environment.

Going forward, the Fund intends to remain at the forefront on this topic, including by addressing the IEO’s recommendations through the Management Implementation Plan on the IEO Report on IMF Advice on Unconventional Monetary Policies. This includes work on the macroeconomic policy mix under lower-for-longer interest rates; financial stability risks; spillovers; and potential distributional effects. Most pertinently, a new Monetary Policy Modeling Unit is tasked with strengthening the Fund’s surveillance and policy research on the topic of low interest rates in the current conjuncture.

Against this backdrop, the WP features a number of workstreams examining the implications of lower-for-longer rates. On macroeconomic policies, the Spring 2020 WEO will feature two chapters analyzing policy challenges in an environment of limited policy space for both advanced economies and emerging markets. On financial stability, the Spring 2020 GFSR will further analyze the channels through which low/negative rates impact banks. Building on these discussions, a briefing on the Impact of Low or Negative Interest Rates will provide a broader and more extensive stock taking of the empirical evidence so far, new insights, and lessons learned. A stock-taking paper on negative interest rates will also be prepared by Fall 2020. Regarding spillovers, the Fall 2020 GFSR will analyze the financial spillovers from unconventional monetary policy. The rise in leverage in recipient countries and their policy options will be examined in the ongoing IPF agenda. A briefing on the Distributional Effects of Monetary Policy will also be presented to the Board in Spring 2020, followed by a paper.

Beyond tools to deal with low interest rates, policymakers also need support on durably exiting from the lower-for-longer environment. Here, the Fund’s work has focused on policies to raise productivity and potential growth (see for example, the Fall 2019 WEO). Such work will continue through bilateral and multilateral surveillance to support policymakers with a better understanding of the key ingredients of a comprehensive policy package that takes into account the interaction of monetary policy with fiscal and structural policies, to help restore growth potential.

The Fund’s Work on Fintech

Building on the Bali Fintech Agenda, the Fund is pursuing a multi-faceted strategy to meet increasing demands from the membership to engage in fintech issues through analytical work, surveillance, capacity development (CD), and global dialogue. The related WP will continue to be adapted as needed.

• Analytical work has advanced on digital currencies, data protection, legal and regulatory frameworks, and financial inclusion. The Board paper on Digital Currencies—Prospects and Cross-Border Implications will examine the implications of the rise of digital currencies for cross-border payments and the associated impact on the stability of the international monetary system. The SDN on Financial Inclusion and Fintech will focus on the impact on financial inclusion, while the one on Cyber-Security and Financial Stability will stock-take the threats arising from cyber risks and assess approaches to managing cybersecurity. A new IMF series on Fintech Notes will provide insights on the pressing topics in the digital economy based on staff research.

• Surveillance and CD will continue to deepen the coverage of fintech issues. Discussions on fintech have taken place in a growing number of Article IV consultations and a pilot exercise to incorporate fintech issues within the FSAP framework has been completed (Singapore FSAP Technical Note). Staff is integrating financial and macro-financial issues, including fintech, into surveillance through the CSR and FSAP Review. Fintech is also targeted as an area for increased coverage in CD.

• The Fund continues to serve as a platform for global dialogue, collaboration and knowledge sharing. It will continue to foster peer-to-peer learning and collaborate with standard-setting bodies, including by organizing high-level seminars, supporting international fora, and participating in various working groups.