Archive for April 22nd, 2009

Useful Central bank Annual reports to read

April 22, 2009

There is plenty of research work to read since last week. IMF’s WEO and GFSRare out and are being recommended by all top econs to read (quite pessimistic reports).

A few Central banks have released their annual reports which provide a good read as well on the impact of crisis on their economies.

  1. ECB (Lucas Papademos, VP of ECB provides a summary) . The chapter on non-ECB EU members is quite interesting. They have faced quite severe pressures in this crisis.  So is the chapter on Slovakia’s inclusion in ECB. It is going to turn into a useful event study for researchers going ahead. How did Slovakia become a member of ECB, what were the challenges, the integration process etc.
  2. Swiss National Bank : Apart from Swiss econ devleopments, it has a nice discussion on the UBS deal (though I could not understand much of it)
  3. HongKong Monetary Authority

Actually, the central banks reports especially the ones with so called modern financial systems/international finance centres should be aggregated to get some policy learnings. Singapore and Bank of England are yet to come out with their reports. Though we all know how UK feels about the modern financial system via its Turner review. Even Iceland story is well-known by now. The aggregated literature would in turn provide future policy lessons for wannabe modern financial systems/international finance centres.

It needed a crisis as big as this one to convince acads that we need to rethink about modern finance. I hope lessons are not lost quickly.


IMF research on duration of recessions

April 22, 2009

IMF World Economic Outlook for April 2009 is a must read. The outlook is to be released today but it has posted 2 excellent research chapters . The first one assesses the duration of recessions, recessions with financial stress and global synchronised recessions. The second one analyses how crisis in advanced ecos impact the developing world. 

The transcript of IMF press conference on these 2 chapters is here. The authors explain the results in the meeting:

On average, financial crisis-associated recessions last one and a half years or two quarters longer than other recessions. Furthermore, after the start of such recessions, it takes almost three years to get back to pre-recession output levels, which is more than one and a half years longer than in the case of other recessions.

Second, we found that globally synchronized recessions are also longer and deeper than other recessions and recoveries, and they are more sluggish. So this is sobering evidence for today, given that we have both financial sector driven and globally synchronized recessions. It turns out that in our sample such a combination is rare, and the past suggests that such recessions last almost two years and that it takes over three and a half years for economies to return to pre-crisis output levels.

The next chart illustrates how the probability of remaining in recessions falls when fiscal stimulus is implemented as shown by the blue relative to the red line. The red line shows you the probability of remaining in recession without policies and the blue line is the one that represents the probability of remaining in recessions after implementing fiscal policies. We also find evidence that suggests that the impact of fiscal policy on the strength of the recovery is smaller for economies that have high public debt levels.

There are very few episodes which have both synchronisation and financial stress (just about 6). So we need to take them with a pinch of salt. It says average recovery time for such recession is 3.5 years. So, if we take NBER’s start date for this recession – Demember 2007, we would see recovery sometime in May 2011.  But again in this recession the policy responses have been very aggressive but is also the most severe since 1929. Only time will tell.

The next chapter findings :

Looking beyond advanced economies, what we’re trying to understand is how severe the current crisis is relative to the past, how it spreads across the world and what the implications are for capital flows going forward……Now to answer these questions, we developed a new financial stress index for emerging economies. 

You can see this index in the following chart. The financial stress in advanced economies, the red line, has reached record levels, truly, compared to the past. It’s truly larger than anything we’ve seen in the past. Financial stress in the emerging economies, these are the blue bars. They also surpass the peaks seen during the Asian crisis, but it’s not in a different ballpark.

Now on stress transmission, we find that the stress in emerging economies typically increases almost one for one with the stress in advanced economies, and this also holds true for the current crisis. That said, there’s clearly some regional variation. As you know, emerging Europe was hit especially hard while economies in Latin America weathered the first wave of the stress fairly well.

The main factors accounting for this variation is the strength of financial linkages that emerging economies have with advanced economies. So countries with higher foreign liabilities tend to experience a stronger pass-through of stress from advanced economies. The twist in the current crisis is that bank lending linkages are the main driver, and it’s not what one might expect, the more protracted investment links which had driven the Asian crisis.

What are the implications for capital flows? Historical evidence suggests that a fast recovery of capital flows is unlikely. The reason is the key role of banking sector stress in the current crisis in advanced economies. The bottom line is that while international financial integration brings opportunities for future growth, it comes with risks for emerging economies to suffer contagion from advanced economy stress. This underlines the need for policy frameworks in emerging economies to be strong, and it motivates the recent initiatives here in the Fund to introduce more flexible credit lines for good performers which should help mitigate this contagion.

IMF has been rethinking its strategy on capital inflows and has even suggested some capital controls might help.

Dissecting the credit crunch in India -II

April 22, 2009

RBI released its monetary policy for 2009-10. Just like my previous post, I was interested to see the credit market data.


IMF credit line for Colombia, Poland and Mexico

April 22, 2009

IMF had initiated a new credit line on 24 March 2009to support strong performing countries. The credit line was to provide a different kind of signal – only countries which had strong macroeconomic fundamentals would get this credit line.  Some economies were facing pressures despite having sound macroeconomics in places. So this credit line would distinguish the goods from the others. Though, IMF has another facility for the same set of countries it was not very useful:

The terms of the FCL represent a strengthening of the earlier Short-Term Liquidity Facility (SLF), which therefore will be discontinued. While the SLF was also designed to cater only to very strong-performing members, several of its design features—including its capped access and short repayment period, as well as the inability to use it on a precautionary basis—limited its usefulness to potential borrowers. The concept of a credit line available for either crisis prevention or resolution and dedicated for only very strong-performing countries, with all its flexible features is new.

 Mexico was the first to express its interest in the credit line in the April G-20 meeting. Now Mexico, Poland and Colombia have taken this facility. The credit line is worth USD 47 bn, 20.5 bn and 10.4 bn respectively. Here is IMF country research on the respective countries: Mexico,  Poland, Colombia. This should give some idea on the relative strength of the economies. However, I still think IMF should have released a one pager on each economy justifying the inclusion.

It is really interesting to see how times are changing. Mexico in particular is always on the other side of the crisis and this time it is seeking a IMF credit line to distinguish itself from the crowd. It will be interesting to see whether this credit will be effective. If it is, it will give IMF the much needed push into global economic policies. 

I am sure it will be a good topic of research in  signalling and international economics. We have just seen a fantastic paperwhich suggests Fed swapline was to help US banks and not necessarily because the countries faced USD funding pressures.

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