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BIS Annual Economic Report-No respite
BIS Annual Economic Report-No respite
June 26, 2022--Introduction
There is no respite for the global economy. Two years ago, it was shaken by the onset of the pandemic, as an overwhelming health crisis turned into an overwhelming economic crisis. While the after-tremors of the pandemic still reverberate, two new shocks hit home in the year under review: the unexpected resurgence of inflation and the tragic war in Ukraine.
Last year's Annual Economic Report (AER) raised the prospect of a bumpy pandexit; bumps have turned out to be a one-two punch.
These tumultuous events are bound to have far-reaching consequences. Are we perhaps witnessing a regime change, from a low- to a high-inflation regime? Is the global economy flirting with stagflation? And are we seeing signs of an end to the post-World War II globalisation era? Meanwhile, the crypto universe is in turmoil, reminding us that there are important developments in the monetary system that we cannot neglect.
On the macro front, policy is facing daunting challenges. In some ways, they are not new; but in others, they are unique. As Mark Twain quipped, "History does not repeat itself, but it often rhymes." The world economy experienced stagflation in the 1970s, following a shift away from a low-inflation regime. The new element is that, against the backdrop of historically low interest rates, debt levels- private and public- have never been as high. This is far from inconsequential. Moreover, the monetary and financial system is in the throes of the digital revolution. This, too, albeit in a different way, is far from immaterial.
WTO rolls out Trade Connectivity Heatmap to highlight bilateral trade between economies
June 23, 2022--The WTO is launching today (23 June) the Trade Connectivity Heatmap, a new visualisation tool designed to give a broad overview of the trade relationships between different economies across different product categories, with the possibility of honing in on data for bilateral product-by-product relationships.
Available via the WTO Stats Dashboard, the Heatmap utilises bilateral trade flow data from more than 180 economies aggregated into around 70 product groups. When a user selects an economy from the drop-down menu, a heatmap is generated. Each square tile represents a share of imports or exports sourced from, or destined for, the selected economy.
The BIS presents a vision for the future monetary system
June 21, 2022--A monetary system based on central bank public goods, using a digital version of sovereign currency as its foundation, could foster innovation while safeguarding stability and security.
As part of a two-tiered monetary system, central bank digital currencies and fast payments systems could enhance efficiency and financial inclusion, while buttressing data privacy.
Recent turmoil in the crypto universe is a reminder of cryptocurrencies' financial vulnerabilities, but their deeper structural inadequacies have been apparent for some time, the report warns.
The Bank for International Settlements (BIS) today set out a blueprint for a future digital monetary system. In a special chapter of its Annual Economic Report 2022, the BIS said a system grounded in a digital representation of central bank money could combine innovation with essential attributes such as safety, stability, accountability, openness and efficiency. Such a system would be capable of adapting continuously to serve the public interest. This vision is built on the foundation of trust in central banks, with a digital version of sovereign currencies at its core.
The Role of Non-bank Financial Institutions in the Intermediation of Capital Flows to Emerging Markets
May 16, 2022--Abstract
This paper compares the behaviour of banks with that of non-bank financial institutions (NBFIs) in the intermediation of portfolio flows to emerging market economies (EMEs). Our analysis shows that investment funds, a key component of NBFIs, tend to reduce their exposure to EMEs more than banks during periods of financial turmoil, such as the Covid-19 pandemic. Moreover, passive funds and exchange-traded funds (ETFs) are more responsive to global shocks than active funds.
Global funds show a lower elasticity to financial volatility than regional funds, while the behaviours of institutional and retail funds are quite similar. Regarding the currency composition of portfolio investments in EMEs, investment funds cut their assets denominated in USD in response to global shocks more than those in other currencies. Finally, the portfolio inflows to EMEs with a higher share of portfolio liabilities held by investment funds rather than by banks and other financial intermediaries tend to be more sensitive to the global financial cycle.
Too Many ESG Funds Mislead Investors
June 20, 2022--Regulatory reckoning with ESG funds does not go far enough.
Regulators are cracking down on ESG funds that pretend to want to save the planet without actually investing in green stocks- an all-too-common practice known as greenwashing.
The European Union has recently adopted a corporate sustainability reporting directive that includes guidelines for funds targeting the ESG market. Similarly, the Securities and Exchange Commission (SEC) is proposing rules requiring ESG funds to disclose information about their strategies.
However, even without greenwashing, investors are too often misled by ESG fund promoters. A typical ESG fund advertisement reads like this: "Investors in the fund will reduce global warming, without giving up returns."
ETFs and Asset Management
June 19, 2022--Traditional asset management groups are racing to expand their offerings in alternative investments as they seek to boost profitability and head off competition from private equity giants.
Direct indexing products are rising in popularity and even some of the bigger firms are warming up to crypto, despite its volatility. Meanwhile, China's population provides a huge potential market for western asset managers
IMF Working Paper-Policy Space Index: Short-Term Response to a Catastrophic Event
June 17, 2022--Summary:
What policy space does a country have for a short-term response to a catastrophic event? To quantify this space, the paper proposes a policy space index. The index combines a quantitative, albeit relatively limited and narrow, fiscal space concept with the indicators of nominal monetary space and reserve space.
Each nominal policy space indicator is then adjusted for individual country's institutional features, such as the status of its currency, income group, access to capital markets, debt distress level, and the exchange rate regime. The final policy space index is derived as a composite of the three nominal policy space indicators, each adjusted for five institutional features. This index is different from the approach to measure fiscal space at the IMF and requires more work before it can be used operationally. The proposed index allows measuring the overall policy space in each country directly in percent of GDP. By way of illustration, the paper applies the index to the Covid-19 crisis.
IMF Working Paper-Policy Space Index: Short-Term Response to a Catastrophic Event
June 17, 2022--Summary:
What policy space does a country have for a short-term response to a catastrophic event? To quantify this space, the paper proposes a policy space index. The index combines a quantitative, albeit relatively limited and narrow, fiscal space concept with the indicators of nominal monetary space and reserve space.
Each nominal policy space indicator is then adjusted for individual country's institutional features, such as the status of its currency, income group, access to capital markets, debt distress level, and the exchange rate regime.
The final policy space index is derived as a composite of the three nominal policy space indicators, each adjusted for five institutional features. This index is different from the approach to measure fiscal space at the IMF and requires more work before it can be used operationally. The proposed index allows measuring the overall policy space in each country directly in percent of GDP. By way of illustration, the paper applies the index to the Covid-19 crisis.
IMF Working Paper-Sovereign Debt
June 17, 2022--Summary:
This paper surveys the literature on sovereign debt from the perspective of understanding how sovereign debt differs from privately issue debt, and why sovereign debt is deemed safe in some countries but risky in others. The answers relate to the unique power of the sovereign.
One the one hand, a sovereign has the power to tax, making debt relatively safe; on the other, it also has control over its territory and most of its assets, making debt enforcement difficult.
The paper discusses debt contracts and the sovereign debt market, sovereign debt restructurings, and the empirical and theoretical literatures on the costs and causes of defaults. It describes the adverse impact of sovereign default risk on the issuing countries and what explains this impact. The survey concludes with a discussion of policy options to reduce sovereign risk, including fiscal frameworks that act as commitment devices, state-contingent debt, and independent and credible monetary policy.
How Crypto and CBDCs Can Use Less Energy Than Existing Payment Systems
June 16, 2022--Environmentally conscious design can make a major difference in the energy efficiency of digital currencies.
Most of the world's central banks have already agreed they should help fight climate change, a critical challenge that necessitates reductions in both energy consumption, which is our focus here, and the carbon emissions associated with the energy consumed.
To meet these aims, it's important to pay attention to the energy used by the payment systems that central banks regulate and oversee. Monetary authorities now have a unique opportunity to improve efficiency as the way people pay is undergoing rapid changes worldwide. Digital currencies, from crypto assets to central bank digital currencies, can play a role in the transformation that policymakers envision.