Last week, the International Monetary Fund published a working paper by Olivier Blanchard and Daniel Leigh revisiting the estimates of the effect of austerity that caused such a stir in the October World Economic Outlook. Many people took the box in the WEO as proof of the absurdity in attempts at deficit reduction.
At the time, I published an article and a technical blog in the FT, casting some doubt on the robustness of the IMF’s work. It also caused a minor stir. I included all the data so people could play around with the numbers themselves if they wished.
In December, another part of the IMF published a working paper using different methodology, which found much smaller multipliers. It is not the first time that different parts of the fund disagree. It will not be the last.
What does the new working paper say and what conclusions should we draw?
IMF data to include Australian dollars. Getty
It is often forgotten that central banks are major players in global capital markets. At the last count, monetary authorities held reserves worth $10.5tn, according to International Monetary Fund data.
Most of this stockpile is thought to be invested in “safe” assets, such as government bonds of highly-rated sovereigns and gold. But, while some of the more open monetary authorities, such as the Swiss National Bank, provide some information about the currency composition of their reserves and asset allocation, most of the big reserves holders, located in Asia, don’t.
Not a lot is known about what’s held in central banks’ coffers. This matters because changes in central bank reserve managers’ behaviour can endanger financial stability. Read more
This week the International Monetary Fund argued that Keynesian short-term multipliers used in economic forecasts had been “systematically too low since the start of the Great Recession”.
The multiplier describes the relationship between changes in taxation or public spending and output. For a multiplier of 1, a $1 increase in taxation will reduce GDP by $1. For a multiplier of 0.5, a $1 reduction in spending will reduce GDP by $0.50. The higher the multiplier, the more painful deficit reduction.
The IMF justified its concern over multipliers by evaluating its April 2010 forecasts for growth. It found that in countries that planned significant fiscal consolidation, its growth forecasts were systematically too optimistic and they were too pessimistic for countries planning to let spending rise quickly or cut taxes. Read more
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IMF/ World Bank meetings
Many of the world’s top central bankers will travel to Tokyo this week for the IMF/ World Bank annual meetings. The meetings take place on Friday and Saturday.
Details of the meetings and the full programme of seminars is available here. Highlights include a talk by Zhou Xiaochuan, governor of the People’s Bank of China, on Sunday at 11:30 a.m Tokyo time (2.30am GMT), and appearances by Fed chair Ben Bernanke and ECB president Mario Draghi at a BoJ/IMF event later in the day. Read more
The Swiss National Bank’s attempt to cap the franc’s gains against the euro has resulted in a 65 per cent expansion of its reserves over the past year. The central bank now holds Sfr421bn in foreign exchange reserves, compared with Sfr255bn at the end of August 2011.
Because of the magnitude of this balance sheet expansion, the cap’s influence has gone far beyond European shores. The latest Cofer data on central banks’ foreign exchange reserves, released by the IMF on Friday, show the significance of the SNB’s cap on a global scale.
According to the data, the total amount of reserves held by the world’s central banks was $10.5tn as of the end of June 2012. They also show the currency allocation for $5.8tn of these reserves (many central banks refuse to declare the currency composition of their FX reserves).
The currency allocation data showed the proportion of reserves denominated in euros had edged up, from 25 per cent in the first quarter of 2012 to 25.1 per cent at the end of June (which doesn’t account for the dollar’s appreciation against the euro). The data suggest that this owes an awful lot to the SNB. Read more
The dust has yet to settle on the Bundesbank’s fight with the ECB over bond-buying, but this has not stopped Germany’s central bank from taking on another heavyweight global financial institution: the International Monetary Fund.
BuBa’s monthly report, published on Monday, includes a whole chapter entitled: “The IMF in a changed global environment.” It becomes clear fairly quickly that eyebrows are being raised in Frankfurt at some elements of the IMF’s stance in the eurozone sovereign debt crisis, where the Fund has taken on its own lending and acted as a member of the “troika” of IMF, ECB and European Commission officials advising on bailouts.
“By taking on excessive risks, the IMF would gradually transform from a liquidity-providing mechanism into a lending institution,” the bank says on the first page of its 15-page discussion. “Such a transformation would neither accord with the legal and institutional provisions of the IMF agreement, nor with the fund’s financing mechanism or its risk control functions.” Read more
Are US equities about to get a boost from a surprising source?
The Bank of Israel this month joined the Swiss National Bank and the Hong Kong Monetary Authority in investing in US stocks, initially setting aside 2 per cent of its $77bn reserves stockpile into share indices.
However, even though the amount could eventually climb to 10 per cent of its reserves, this hardly the sort of news that will move a market as big as US equities, for which $7.7 billion is small change.
But if other central banks, which collectively manage $10.7trn-worth of reserves, follow suit, then the impact could be significant. Read more
Hungary’s new central bank act has led to outcry from the IMF, the European Central Bank, the European Commission and the National Bank of Hungary itself.
The act, rightly, is perceived as part of a broader power grab by prime minister Viktor Orbán from any institution or individual that serves as a check on government policy. It is also the latest in a series of attempts to undermine the current governor, András Simor.
However, some of the measures that the act proposes already apply to many of the major central banks.
It is not so much a case of what the act says, then. More what it signifies.
That highlights just how flimsy and susceptible to politicians’ whims central bank independence actually is. Read more
The IMF and the World Bank will regard the publication of its report on the first Financial Sector Assessment Programme, or FSAP, for China on Tuesday as something of a triumph.
Pre-crisis, China (along with the US) refused to undergo the programme, which serves as a health check on a country’s financial network. Now, they are compulsory for those financial networks deemed systemically important.
People's Bank of China. Image by Getty.
That’s to be applauded; the more that is done to warn of risks to financial stability, the better. But the People’s Bank of China’s response to the exercise highlights its limits. Read more
Officials the world over are keen on macroprudential policy. But it’s far from obvious what tools macroprudential policymakers should be given. It’s also not clear the degree to which central banks should be responsible for exercising the macroprudential mandate.
Fear not. The IMF released a guide on Tuesday on the pros and cons of different institutional arrangements for macroprudential policymaking. What the guide shows is that the degree to which central banks are responsible boils down to how officials weigh up two sets of risks: those stemming from a lack of accountability and those caused by groupthink. Read more