Monetary policy actions in one of the world’s largest economies can have a ripple effect around the globe. In a new blog, the IMF’s Stephan Danninger, Kenneth Kang and Hélène Poirson explain how emerging economies must prepare for the effects caused by the US Federal Reserve’s move to increase interest rates and taper asset purchases as inflation rises.
The “spillover” caused by a tightening of US monetary policy could be benign if its gradual, well communicated and is in response to a strengthening recovery. But if the Fed moves faster or more aggressively to contain inflation, it could rattle financial markets and tighten financial conditions globally. For emerging markets, this could lead to capital outflows and currency depreciation, the authors write.
–Difficult tradeoffs: Emerging markets are already facing difficult policy tradeoffs between addressing rising debt and inflation or supporting a recovery. In response to tighter funding conditions, emerging markets should tailor their response based on their circumstances and vulnerabilities.
📺 Watch IMF Managing Director Kristalina Georgieva discuss how the Fed’s monetary policies could impact emerging markets. “So far the risk of spillover impact on other countries is being mitigated. It is, though, something we are concerned about,” she said this week on CNBC.
(Photo: DA-KUK/iStock by Getty Images)
As crypto assets continue to expand, their correlation with traditional holdings like stocks has increased significantly, raising the risk of contagion across financial markets, according to a new blog by Tobias Adrian, Tara Iyer and Mahvash S. Qureshi.
Prior to the pandemic, crypto assets such as Bitcoin and Ether showed little correlation with major stock indices. In fact, they were thought to diversify risk and act as a hedge against swings in other asset classes. But this changed after the extraordinary central bank crisis responses of early 2020: Crypto prices and US stocks both surged amid easy global financial conditions and greater investor risk appetite.
–A risk to financial stability: Given the relatively high volatility and valuations of crypto assets, their increased co-movement could soon pose risks to financial stability especially in countries with widespread crypto adoption. It is thus time to adopt a comprehensive, coordinated global regulatory framework to guide national regulation and supervision and mitigate the risks stemming from the crypto ecosystem, the authors conclude, drawing on the findings of a recent global financial stability note.
(Photo: Bruno DEMÉOCQ/ IMF Photos)
Africa remains reliant on COVID-19 vaccine imports and donations. Meeting this demand and bringing the pandemic under control in the region is key to ending the crisis worldwide. But efforts to meet urgent needs should not come at the expense of supporting the region’s ability to supply vaccines for itself, for this pandemic and future healthcare needs, IMF Managing Director Kristalina Georgieva writes in a new blog.
Without predictable and reliable vaccine supplies, for example, health authorities are often forced to react at short notice to accept doses, often with limited shelf lives, greatly complicating delivery logistics for already-stretched health systems. In short, true resilience in Africa cannot depend on the repeated generosity of the international community. It requires scaled-up local manufacturing capacity and strengthened regional supply chains, Georgieva writes.
(Art: John Jay Cabuay)
The pandemic has raised questions about how we function as a society and what we should value as individuals.
In our latest issue of Finance & Development, focusing on health and well-being, we hear from a diverse group of thinkers, policymakers, health experts, scientists, and academics–Michelle Bachelet, Jeffrey Sachs, K.K. Shailaja, Christian Happi, Kate Soper, and María del Rocío Sáenz Madrigal. They reflect on lessons learned from the pandemic as we seek to cultivate a more resilient world.
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