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International Monetary Fund. Middle East and Central Asia Dept.

The coronavirus (COVID-19) crisis led to a surge in government debt and financing needs as many countries in the Middle East and Central Asia reacted swiftly to mitigate the pandemic’s impact. Although several of these countries successfully accessed international financial markets, domestic banks covered a significant share of emerging markets’ financing needs, further expanding their already significant exposure to the public sector. By contrast, most low-income countries (LICs) had a small response to the crisis because of financing and policy space

International Monetary Fund. Middle East and Central Asia Dept.

Abstract

A year into the coronavirus (COVID-19) pandemic, the race between vaccine and virus entered a new phase in the Middle East and Central Asia, and the path to recovery in 2021 is expected to be long and divergent. The outlook will vary significantly across countries, depending on the pandemic’s path, vaccine rollouts, underlying fragilities, exposure to tourism and contact-intensive sectors, and policy space and actions. 2021 will be the year of policies that continue saving lives and livelihoods and promote recovery, while balancing the need for debt sustainability and financial resilience. At the same time, policymakers must not lose sight of the transformational challenges to build forward better and accelerate the creation of more inclusive, resilient, sustainable, and green economies. Regional and international cooperation will be key complements to strong domestic policies.

Mr. Tobias Adrian, Vitor Gaspar, and Mr. Francis Vitek

the decentralized conduct of these policies to minimize an intertemporal loss function quadratically penalizing the deviations of inflation from target and output from potential, subject to our representation of the world economy. We then examine how the policy mix should be adjusted in response to domestic and global financial cycle upturns and downturns, with and without policy space constraints. We represent the world economy with an estimated medium-scale heteroskedastic linearized DSGE model of a pair of economies that are asymmetric in size. This framework

International Monetary Fund. Research Dept.

national policies to complement the multilateral effort. These will require much more tailoring to country-specific conditions and better targeting, as policy space constraints become more binding the longer the pandemic lasts. Multilateral Actions with Positive Spillovers Global vaccine deployment : The global community needs to increase its efforts to vaccinate adequate numbers everywhere. This would save millions of lives by reducing risks of severe health outcomes and deaths, lower the risks of new variants emerging, and thereby add trillions of dollars to the

International Monetary Fund. Monetary and Capital Markets Department

capital flow reversals and an abrupt increase in financing costs. To that end, the recent allocation of special drawing rights by the IMF for all countries ( IMF 2021a ) will provide liquidity relief and help ease policy space constraints. Selected macroprudential policies and prudent macro-financial risk management should be employed where financial vulnerabilities are building. This targeted approach may help tackle pockets of elevated vulnerability while avoiding a broad tightening of financial conditions. Policymakers should promote the depth of emerging market

Mr. Jiaqian Chen, Mr. Raphael A Espinoza, Carlos Goncalves, Tryggvi Gudmundsson, Martina Hengge, Zoltan Jakab, and Jesper Lindé
The COVID-19 pandemic and the subsequent need for policy support have called the traditional separation between fiscal and monetary policies into question. Based on simulations of an open economy DSGE model calibrated to emerging and advance economies and case study evidence, the analysis shows when constraints are binding a more integrated approach of looking at policies can lead to a better policy mix and ultimately better macroeconomic outcomes under certain circumstances. Nonetheless, such an approach entails risks, necessitating a clear assessment of each country’s circumstances as well as safeguards to protect the credibility of the existing institutional framework.
Mr. Jiaqian Chen, Mr. Raphael A Espinoza, Carlos Goncalves, Tryggvi Gudmundsson, Martina Hengge, Zoltan Jakab, and Jesper Lindé

the ECB’s purchases of Belgian government bonds over 2015–20 were significant and that the share of Belgian assets in the ECB’s purchases remained relative stable ( Figure 8 ). Crucially, the scale of the asset purchase program in the secondary market was significant in terms of Belgium’s refinancing needs. In 2020, ECB net purchases of Belgian government debt (only authorized in the secondary market) were equivalent to around 80 percent of net debt issued by the Belgian government in the primary market. Considering the macroeconomic environment and policy space

International Monetary Fund. Monetary and Capital Markets Department

economies by 2021, where initial government debt ratios are generally higher and conventional monetary policy space constraints are widely binding, versus 3.9 to 15 percentage points across emerging market economies. In aggregate, world output falls by 3.9 percent by 2021, of which 2.5 percent is accounted for by the secular stagnation layer from the WEO, while energy and nonenergy commodity prices fall by 40 and 22.4 percent, respectively ( Annex Figure 1.2.2 ). Annex Figure 1.2.2. Global Market Disruption Scenario Simulation Results Source: IMF staff estimates

Mr. Tobias Adrian, Vitor Gaspar, and Mr. Francis Vitek
This paper jointly analyzes the optimal conduct of monetary policy, foreign exchange intervention, fiscal policy, macroprudential policy, and capital flow management. This policy analysis is based on an estimated medium-scale dynamic stochastic general equilibrium (DSGE) model of the world economy, featuring a range of nominal and real rigidities, extensive macrofinancial linkages with endogenous risk, and diverse spillover transmission channels. In the pursuit of inflation and output stabilization objectives, it is optimal to adjust all policies in response to domestic and global financial cycle upturns and downturns when feasible—including foreign exchange intervention and capital flow management under some conditions—to widely varying degrees depending on the structural characteristics of the economy. The framework is applied empirically to four small open advanced and emerging market economies.