These are not the main chapters of the report but is an analysis of topical issues. They decide these chapetr topics 6 months in advance and are actually quite good at it, as when they are finally released it really is topical. IMF may not be able to forecast outlook (which is the main part of the report) etc but is quite good at thinking on these topical issues.
WEO has 2 chapters:
- Chap 3: Lessons for Monetary Policy from Asset Price Fluctuations
- Chap 4: What’s the Damage? Medium-Term Output Dynamics after Financial Crises
GFSR also has 2 chapters:
- Chap 2: Restarting Securitization Markets: Policy Proposals and Pitfalls
- Chap 3: Market Interventions during the Financial Crisis: How Effective and How to Disengage?
I just finished reading the transcript of WEO chapters. So what do they say? Chap 3: Lessons for Monetary Policy from Asset Price Fluctuations says:
The first part of the chapter takes a look back at history, takes a look at asset price busts in advanced economies over the last four decades, and what we find is that there are some clear macroeconomic patterns leading up to these busts, including the most recent crisis. For example, rapidly expanding credit is often associated with a bust one to three years followed, and, to that, we can also add the phenomenon of deteriorating current account balances and rapid shifts of expenditures into residential investment.
At the same time, we also find that output and inflation are not actually very good leading indicators of ensuing busts. So they’re not good indicators of that kind of overheating, and this also holds for the current crisis.
we also take a look at the role of monetary policy in the lead-up to asset price busts, including the current crisis. Now, we find that monetary policy was not the smoking gun in the sense that monetary policy does not provide an encompassing, systematic explanation of the differences in asset price experiences across countries. There are too many exceptions in countries’ experiences with asset prices for this to be a totally convincing explanation as a cause of the crisis. However, we do find that many of the same macroeconomic patterns of the lead-ups to asset price busts apply to the lead-up to the current crisis.
- what lessons can we draw from this about how monetary policymakers should act going forward?….. We look at whether monetary policy could and should be responsible for more than just targeting goods price inflation, in particular, whether there’s a role for leaning against some of these phenomena like the expansion in credit and whether that can produce more stable outcomes.
- And, we say that on the assumption that policymakers can correctly understand the drivers of the shocks going on, in the case where, for example, there are financial shocks, there is a good case for reacting more strongly than would otherwise be usual to those underlying phenomena.
The 4th chapter Market Interventions during the Financial Crisis: How Effective and How to Disengage? says:
The second study, the one that we’ve been working on, looks at output dynamics following 88 banking crises that took place over the past four decades in a very wide range of countries — advanced, emerging, developing. Our focus was on the medium run, which here we define as seven years after the crisis. Since the first glance at the data told us that there was a wide range of experiences after a banking crisis, we also sought to try to link the various outcomes with initial conditions and policies after the crisis.
- The first one was that banking crises tend to have a long-lasting impact on the level of output. And, for the average country, about 7 years after the crisis, the level of output was still around 10 percent below its pre-crisis trend although there was a very large variation across crisis episodes. It’s interesting that this result holds for both advanced and emerging economies.
- The second finding was that this depressed path of output was mainly due to reductions in all factors of production, which, the employment rate, capital and productivity.
- Now the third result which we have in our study was that initial conditions have a strong impact on the size of the ultimate output losses, and also policy efforts, post-crisis, can tend to be associated with lower output losses.
- we find that economies that apply macroeconomic stimulus in the short run following the crisis tend to have smaller output losses over the medium run, and there’s also some evidence that structural reform efforts are associated with better medium-run outcomes.
in some ways, the analysis has sobering implications for the medium-run output prospects in economies that have suffered recent banking crises. However, the very forceful macroeconomic policy response so far, in the form of substantial fiscal and monetary stimulus, should help mitigate the impact of the crisis on output this time around. Still, to the extent that there are remaining concerns about losses, they underscore the importance of implementing reforms that help raise medium-term output prospects and facilitate the reallocation of resources across sectors.
Both these issues are being discussed quite a bit already. Central Banks to have an expanded role and banking crises lead to loss in potential output for a long period of time.