IMF:Asset Purchases | Price Pressures | Rethinking GDP

 

Dear maria, Happy New Year and welcome to the first Weekend Read of 2022! In today's edition we focus on the risks and benefits of asset purchases by emerging market central banks, an overview of our inflation coverage, new ways to measure economic prosperity, rethinking debt, and a look back at 2021. Asset Purchases Photo: aldomurillo/iStock by Getty Images Risk-Free Financing? During the COVID crisis, central banks in emerging markets from Poland to the Philippines bought large sums of debt issued by their own governments to support their economies, without causing noticeable capital flight or exchange rate pressures. Should these asset purchases be viewed as an exceptional response to the COVID crisis, or could they become a more permanent addition to central banks’ policy options? The IMF’s Tobias Adrian, Christopher Erceg, Simon Gray, and Ratna Sahay answer this question in a new blog. While asset purchases can help central banks achieve their mandated objectives, they also pose significant risks, the authors say. --Balance sheet risks: One risk is to central banks’ own balance sheets: central banks can lose money if they buy sovereign or corporate debt when interest rates are low and then policy rates rise sharply. This may make a central bank less willing to tighten monetary policy. There is also a risk that governments grow accustomed to cheap financing and pressure central banks to continue, even if inflation rises. The resulting loss of confidence in a central bank’s ability to keep inflation low and stable could precipitate periods of high and volatile inflation.  Watch a recent IMF roundtable discussion on new monetary policy tools for emerging market and developing economies, where South African Reserve Bank Government Lesetja Kganyago, Bank of Russia Governor Elvira Nabiullina, and World Bank Chief Economist Carmen Reinhart underscored the risks. Inflation (Ljubaphoto/iStock by Getty Image) Price Pressures Minutes from the Federal Reserve’s most recent policy meeting published this week underscored the challenges facing central bankers as they seek to subdue inflation without snuffing out economic recovery. The IMF has warned for some time of the risks of inflation, including in this blog by Tobias Adrian and Chief Economist Gita Gopinath from December, in which the authors said it would be appropriate for the Federal Reserve to accelerate the taper of asset purchases and bring forward the path for policy rate increases. --Latin America: Annual inflation in the United States is now running at 6.8 percent, the fastest since 1982, but it is not the only economy grappling with fast-rising prices. In Latin America higher food prices have fueled inflation and led some central banks to raise interest rates early on in the recovery, as shown in this Chart of The Week. --Sub-Saharan Africa: In sub-Saharan Africa, too, the cost of food is a significant contributor to inflation, owing to a combination of higher oil prices, droughts, export restrictions imposed by some major food exporters, and stockpiling in some countries, as discussed here. --Asia: In Asia, meanwhile, inflationary pressures have so far been less pronounced than in other regions. But that could soon change, partly owing to higher shipping costs, as shown in this Chart of the Week. F&D Art: Sally Deng; iStock / Tamara Luiza Measuring Economic Prosperity How should economists measure growth and prosperity? In our most recent issue of Finance & Development magazine, Miles Kimball, Daniel Benjamin, Kristen Cooper and Ori Heffetz write about the principles that could define a new measure of economic prosperity beyond Gross Domestic Product to account for happiness and satisfaction.  The recognition that GDP cannot encompass many dimensions of well-being has prompted efforts to develop measures that reflect a more complete account of what people care about. The idea is not to give up on GDP—nor to replace it with some other one-dimensional measure, such as self-reported life satisfaction, which, like GDP, gives only a partial and hence potentially misleading picture. Instead, a measure that captures many dimensions of national well-being and complements GDP is needed, they write. Read the entire article.  Listen to a recent IMF podcast with Kimball. Check out our December Issue of Finance & Development.  Want to get a print copy delivered to your home or office? Click here to subscribe.     IMF Podcast: Public Debt In a new IMF Podcast, economist Barry Eichengreen discusses his new book, which examines the evolution of sovereign debt from the wars of medieval Europe through the Covid-19 crisis, illustrating public debt's many positive uses, from reacting to financial crises to building public works.  (Photo: IMF)   IMF MENA Update In case you missed it, we recently sent the third issue of our monthly IMF MENA update newsletter, reporting on the IMF's activities in the Middle East and North Africa region. You can also read it in Arabic. If you want to subscribe to this newsletter, click here to access your preferences and select "add subscriptions." (Photo: IMF/Joshua Roberts)   Essential Reading: Inclusive Growth Read the IMF's latest research on gender, inequality and inclusive growth. In our eLibrary section you can access all the latest papers on these topics.   Quote of the Week "Safeguarding people’s health relies on resilient health systems that ensure everyone has access to the good-quality services they need, without facing financial hardship." —World Health Organization Director-General Tedros Adhanom Ghebreyesus in his recent F&D article "Financing Future Health Systems" WEEKLY ROUND-UP 01. Top 10 Blogs of 2021 The arc of 2021, from tentative recovery to resurgent uncertainty, may feel like more of a circle for many around the world who are understandably weary of the pandemic and eager for a return to normal. But to monetary and fiscal policymakers—who could be forgiven for also feeling weary amid prolonged crisis—the year ended in a much different place, as many prepare to unwind unprecedented support. That normalization process will demand clear communications despite facing many unknowns. Among our most-read blogs of 2021, readers sought insight on the widening gaps in the global economic recovery as well as diverging vaccination prospects. 02. IMF Podcasts: The Year in Review The past year has brought us new challenges even as the old ones persist. If anything, the ongoing pandemic has taught us to think differently about tackling the challenges and questions we currently face when it comes to big issues like climate change, gender equality, inflation and economic measurement. In this editor’s pick of 10 podcasts from 2021, we present (in no particular order) conversations with top thinkers on a range of topics and issues that we will continue to confront in 2022 and beyond. 03. Spain's Calviño to Chair IMFC Members of the International Monetary and Financial Committee (IMFC), the policy advisory committee of the IMF's Board of Governors, selected Nadia Calviño, Spain’s First Vice President and Minister for Economy and Digitalization as Chair of the Committee for a term of two years. Calviño replaces Magdalena Andersson, currently Sweden's prime minister, who relinquished her duties as IMFC Chair at the end of December.  Asia’s inflation has so far been more moderate compared with other regions, affording central banks room to keep interest rates low and support economic recovery, as shown in our Chart of the Week by Yan Carrière-Swallow, Pragyan Deb and Daniel Jiménez. However, Asia’s tepid price gains may see greater momentum next year. The outlook remains uncertain, and central banks should be ready to tighten policy if inflation pressures and expectations mount. Adam Behsudi Editor IMF Weekend Read abehsudi@IMF.org