IMF Market Insights

Could sovereign green bonds be a catalyst for sustainable debt market development? In traditional bond markets, sovereign bonds provide benchmarks and serve as catalysts for corporate bond market development. Contrary to the usual sequence of bond market development, sovereign issuers are latecomers to sustainable bond markets. A new #IMF Working Paper 👉 https://lnkd.in/eCv4aD9V presents an empirical study that finds sovereign green bond issuance can have quantitative and qualitative benefits for the development of private sustainable bond markets. The results suggest that both the number and the size of corporate green bond issuance increase more in a jurisdiction after the sovereign debut (i.e., first-time issuance). The results are more pronounced in countries with stronger climate policies. Sovereign green bond issuance also improves the quality of green verification standards in the corporate bond market more generally, consistent with the aim of fostering third-party reviews and promoting best practice in green reporting and verification. Finally, the work provides evidence that the sovereign debut increases liquidity and diminishes yield spreads of corporate green bonds in the same jurisdiction. Read the paper 👉 https://lnkd.in/eCv4aD9V Gong Cheng, Torsten Ehlers, Frank Packer, Luna (Yanzhe) Xiao

Can Energy Subsidies Help Slay Inflation? Energy subsidies are viewed by many policymakers as helpful in the fight against inflation. A recent #IMF Working Paper 👉 https://lnkd.in/etxXCbcq examines the many open questions about the conditions under which energy subsidies are likely to be effective in lowering inflation, or, conversely, when they may be counterproductive. Many countries responded to the inflation runup in recent years by using various forms of energy subsidies, often targeted mainly to households, to help curb inflation as well as to cushion the effects on household purchasing power. The paper finds more scope for energy subsidies to reduce core inflation and stimulate demand if introduced by a small group of countries which collectively do not have much influence on global energy prices. However, the conditions under which consumer energy subsidies reduce inflation are still quite restrictive, and this type of policy may well be counterproductive if the resulting increase in external debt is high enough to trigger sizeable exchange rate depreciation. Such effects are more likely in emerging markets with shallow foreign exchange markets. If the primary goal of using fiscal measures in response to spikes in energy prices is to shield vulnerable households, then targeted transfers are much more efficient as they achieve their goals at lower fiscal cost and transmit less to core inflation. Read the paper 👉 https://lnkd.in/etxXCbcq Christopher Erceg, Marcin Kolasa, Jesper Lindé, andrea pescatori

New Perspectives on QE and Central Bank Capital Policies Central banks have come under increasing criticism for large balance sheet losses associated with quantitative easing (QE), and some observers have also argued that QE helped fuel the post-COVID-19 inflation boom. A recent #IMF Working Paper reconsiders the conditions under which quantitative easing may be warranted considering the recent high inflation experience. The paper emphasizes that the merits of quantitative easing should be evaluated based on the macroeconomic stimulus it provides and its effects on the consolidated fiscal position, and not simply on central bank profits or losses. Using an open economy model with segmented asset markets, the authors show how QE can provide a sizeable boost to output and inflation in a deep recession and improve the consolidated fiscal position—even if the central bank experiences considerable losses. However, the commitment-based features of QE and the possibility that upside inflation risks are bigger than recognized pre-pandemic call for more caution in using QE closer to full employment. The authors also then consider how central banks might modify their policies for allocating profits to the government in light of large-scale losses. They suggest that a more forward-looking and risk-based approach may be desirable in helping protect central bank financial autonomy and ultimately independence. Read the paper 👉 https://lnkd.in/egGhAyWg Tobias Adrian, Christopher Erceg, Marcin Kolasa, Jesper Lindé, Roger McLeod, PhD, Romain Veyrune, Pawel Zabczyk

New Working Paper: Escaping the Financial Dollarization Trap: The Role of Foreign Exchange Intervention Financial dollarization is considered a source of macroeconomic instability in many emerging economies. Dollarization constrains the ability of central banks to stimulate output during economic downturns. In contrast to the conventional monetary transmission mechanism, a monetary policy loosening in a dollarized economy leads to a currency depreciation, adverse balance sheet effects, and a contraction in investment and output growth. In a new #IMF Working Paper 👉 https://lnkd.in/emyuhKN7, authors Paul Castillo; Ruy Lama; and Juan Pablo Medina evaluate the role of foreign exchange reserves in facilitating macroeconomic stabilization in a financially dollarized economy. First, the paper shows empirically that foreign exchange intervention in response to capital outflows can largely reduce the volatility of output and the real exchange rate in dollarized economies. Next, a small open economy model with foreign currency debt and balance sheets effects is developed. This quantitative model shows that an active foreign exchange intervention policy is sufficient for offsetting the output volatility associated with financial dollarization. These results can explain the prevalence of low macroeconomic volatility in some dollarized economies and they highlight the role of foreign exchange reserves in reducing the welfare costs of dollarization. Read the paper 👉 https://lnkd.in/emyuhKN7

Why is central bank independence important, and how can it be protected? In a recent speech 👉 https://lnkd.in/eAmXnDUY, IMF Financial Counsellor Tobias Adrian spoke about central bank independence and what central banks can do to safeguard independence and ensure policy credibility. Many central banks are under tremendous pressure. Post-pandemic inflation levels required central bankers to tighten monetary policy. However, this created significant political pushback as it causes growth to slow, unemployment to rise, and the fiscal position to deteriorate. Additionally, financial stability measures taken by central banks, including through emergency liquidity assistance and bank resolution, have led to further expanded balance sheets and come with increased financial risk for central banks. Central bank stakeholders, including parliament and market participants, have increased expectations of what the central bank can and should do. But, with a more challenging environment in terms of economic growth and inflation, as well as expanded mandates, stakeholders may increasingly scrutinize the central banks’ policies and operations and question the validity of independence. The IMF’s new global index for central bank independence, based on ten metrics, is aimed at helping central banks and policymakers strengthen central bank independence. Read how: https://lnkd.in/eAmXnDUY

Work for the IMF. Work for the World. The #IMF Monetary and Capital Markets Department and the IMF East Africa Regional Technical Assistance Center (AFRITAC East), located in Dar es Salaam, Tanzania, are seeking a qualified candidate to fill the position of Resident Advisor Monetary and Foreign Exchange Operations Advisor to deliver training and technical assistance in various aspects of monetary policy implementation, foreign exchange operations, and the development of relevant financial market infrastructures. For the selected candidate, this is a full-time position based in Dar es Salaam with an initial appointment term of one year (renewable). The primary mission of AFRITAC East is to enhance the economic and policymaking capacity of its eight member countries (Eritrea, Ethiopia, Kenya, Malawi, Rwanda, South Sudan, Tanzania, and Uganda) by providing capacity development—i.e., training, and technical assistance—under the auspices of the IMF. Operational since 2002, AFRITAC East provides support in building capacity in public financial management and revenue administration, macro-fiscal analysis, monetary and financial sector policies, and macroeconomic frameworks, forecasting, and statistics (for more information, see https://lnkd.in/e6-4HN4s), working closely with other departments at IMF headquarters. The selected candidate will report to the Monetary and Capital Markets Department’s Central Bank Operations Division for all technical aspects of his/her work, including the set up and management of his/her workplan as an integral part of the delivery of training courses and technical assistance. For all other aspects, the selected candidate will report jointly to the Technical Assistance Strategy Division and the AFRITAC East Director. He/she will be involved in leading/contributing to the delivery of training to country officials at facilities in AFRITAC East and in other locations in East Africa. For more details, please visit the job ad on the IMF’s general recruitment webpage 👇 https://lnkd.in/epK7KEMp 

Work for the IMF. Work for the World. The #IMF Monetary and Capital Markets Department has a vacancy in its Central Banking Operations Division for a Headquarter-based Financial Sector Expert/Senior Financial Sector Expert. The vacancy is for three-year term appointment, in accordance with the Fund’s categories of employment. The Central Banking Operations Division covers a broad range of areas including the implementation of monetary and exchange rate policies, lender of last resort, collateral frameworks, financial market development, international reserves management, central bank accounting, governance, strategic planning, risk management, and currency issuance. The division works closely with other divisions in the Monetary and Capital Markets Department (financial crisis, financial regulation, monetary and macroprudential policies, and debt management) and other IMF departments and country authorities delivering policy analysis, technical assistance, and surveillance products, including the IMF's Global Financial Stability Report and the Financial Sector Assessment Program (FSAP). This position is focused on contributing to the analytical work that underpins the advice provided by the Central Banking Operations Division. The key responsibilities are to deliver technical assistance, contribute to the division’s analytical and capacity development agenda, as well as to develop policy positions. The successful candidate may also have the opportunity to participate in technical assistance, FSAP, and Article IV consultation missions. For more details, please visit the job ad on the IMF’s general recruitment webpage 👇 https://lnkd.in/eaupAXbz

Banca d’Italia and the IMF’s Monetary and Capital Markets Department will hold a research conference, to be held in Venice on June 13-14, on the integration of sustainability profiles in the credit risk assessment of non-financial firms. The conference will provide a forum for discussion on prominent issues for credit institutions, investment firms, insurance companies, rating agencies, and central banks towards the integration of sustainability factors in the credit risk assessment of firms, in particular SMEs, in response to regulatory developments, the supervisory framework, and sustainable investment practices. Conference agenda: https://lnkd.in/e7pqKyqv Register to join in person or virtually by e-mailing Sustainability.Conference.Venice@bancaditalia.it. Fabio Natalucci, Ekaterina (Katya) Gratcheva, Johannes Kramer, CFA, Peter Windsor

Growing linkages between financial institutions in recent years, often a key symptom of the buildup of systemic risk, has meant a growing role for systemwide liquidity analysis. The global dash-for-cash in 2020, for instance, triggered investors to sell sovereign and corporate securities rapidly, pushing up yields and slashing asset prices. In turn, corporates tapped into their credit lines and redeemed shares in fears of impending cash shortages, exerting pressure on the balance sheets of commercial banks and investment funds. The increasing uncertainties and severity of liquidity shocks and their systemwide implications have sown seed in the international financial community in searching for adequate toolkits to monitor and strengthen system wide liquidity resilience. Several important endeavors—such as the December 2022 and 2023 Financial Stability Board report on Non-Bank Financial Intermediation—speak to the increasing demand in understanding the interaction between banks and nonbank financial intermediaries in transmitting and potentially amplifying liquidity shocks within the system, giving rise to financial stability concerns. In a new working paper 👉 https://lnkd.in/euXj2K9P IMF staff develop a novel Systemwide Liquidity framework to identify liquidity stress in the system that goes beyond banks and to assess the role played by non-bank financial institutions (NBFIs) in episodes of liquidity stress. The framework, which complements standard liquidity and interconnectedness analyses, traces the flow of liquidity among various agents in the economy and explores possible transmission channels and amplification mechanisms of correlated liquidity shocks. The framework uses unique balance sheet and asset encumbrance data to demonstrate the importance of assessing liquidity at the system level by allowing for: 🔹 Analyses of each agent’s contribution to liquidity stress;  🔹 Analyses of the impact of different behavioral assumptions (e.g., pecking order of collateral utilization, negative externalities of fire-sales and margin positions); and  🔹 Policy simulations. Since this framework covers a comprehensive set of financial instruments and transactions, it paves the way for harmonization of systemwide liquidity analysis across countries. Read the paper 👉 https://lnkd.in/euXj2K9P Xiaodan Ding, Dimitris Laliotis, C. Priscilla Toffano

The IMF’s most recent assessment of Luxembourg’s large, interconnected, and complex financial system took place against heightened economic, financial, and geopolitical uncertainty. The 2024 Financial Sector Assessment Program (FSAP) found Luxembourg’s financial sector to be largely resilient against severe shocks. Investment funds have grown since the last financial sector assessment in 2017, while their connections to other funds, banks, nonbank financial intermediaries, and foreign entities have also increased. The banking sector maintains higher capital ratios than euro area peers, has low but rising nonperforming loans, and benefits from support to the economy from a AAA-rated sovereign. Domestic banks face risks from the ongoing downturn in credit and house price cycles, especially in the high-risk mortgage segment. Securities portfolios in large banks are mostly held-to-maturity and spread across euro area issuers. Read the full report 👉 https://lnkd.in/e3pE_Jpw