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Law > Business and Financial

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Cover Shocks and Capital Flows
Shocks and Capital Flows
Policy Responses in a Volatile World

Abstract

The high exposure of open economies to shocks makes them particularly vulnerable to volatile capital flows and advanced economy monetary policy spillovers. How should and do domestic policymakers respond? The traditional answer has been to use flexible exchange rates as a shock absorber. But flexible exchange rates may not offer full insulation when financial markets are imperfect. This book brings together recent empirical studies at the International Monetary Fund (IMF) on the effectiveness of different tools in responding to such shocks. The 18 chapters in this volume provide a rich background to the recently launched Integrated Policy Framework by the IMF. They comprise assessments of countries’ actual use of different tools, as well as in-depth evaluations of their effectiveness and side effects, covering macroprudential policies, monetary policy, foreign-exchange intervention, and capital flow management policies. Many of the studies involve new data and methods to tackle the inherently difficult problems in identifying and comparing the effects of policies under different circumstances. As a result, the volume offers the reader a comprehensive, in-depth coverage of the policy-oriented empirical research that has informed the development of a new way of thinking about open-economy macroeconomics at the IMF.

Keywords:
Capital flows; monetary policy; exchange rate policy; foreign exchange intervention; macroprudential policy; capital controls; FX debt; account restrictiveness; exchange rate intervention; IT regime; Exchange rates; Macroprudential policy instruments; Global; Asia and Pacific; Caribbean; Central America; Europe
Cover IMF Working Papers
Modeling the Reserve Demand to Facilitate Central Bank Operations
Zhuohui Chen, Nikolaos Kourentzes, and Mr. Romain M Veyrune
Implementing monetary policy largely consists in controlling short-term interest rates which supposes having a good understanding of banks’ demand for liquidity also called “reserves” at the central bank. This work aims to offer a modeling methodology for estimating the demand for reserves that itself is influenced by various macro and market structure variables. The model can help central banks to identify ”stable points” on the demand for reserves, which correspond to the levels of reserves for which the short-term interest rate volatility is minimal. Both parametric and non-parametric approaches are provided, with a particular focus on capturing the modeling uncertainty and, therefore, facilitating scenario analysis. A method is proposed to test the forecasting performances of different approaches and exogenous regressors combination, finding that simpler parametric expressions provide on balance better performances. Adding variables to both parametric and non-parametric provides better explanations and predictions. The proposed methodology is evaluated using data from the Euro system and the US Federal Reserve System.
Keywords:
Reserve demand; scenario analysis; short-term interest rate; sigmoid; modeling methodology; market structure variable; modeling uncertainty; explanatory variable; Short term interest rates; Standing facilities; Deposit rates; Central bank operations; Global
Cover IMF Working Papers
Digital Tokens: A Legal Perspective
Mr. José M. Garrido
Tokens are units digitally represented in a distributed ledger or blockchain. The various uses of this technology have the potential to transform a wide array of economic activities, from traditional commercial transactions to sophisticated financial undertakings. This paper explores the similarities and differences of tokens with traditional legal instruments in commercial law and how tokens could offer superior solutions, provided that proper legal foundations are established for their operation, including aspects of the law of securities and consumer protection law.
Keywords:
Tokens; Commercial Law; Securities Law; Fintech; Consumer Protection; token taxonomy; non-fungible token; del Mercado de Valores; digital signature; token offering; aspects of the law of securities; Securities; Blockchain and DLT; Smart contracts; Virtual currencies; Securities regulation; Global
Cover FinTech Notes
Capital Flow Management Measures in the Digital Age: Challenges of Crypto Assets
Mr. Dong He, Annamaria Kokenyne, Xavier Lavayssière, Ms. Inutu Lukonga, Nadine Schwarz, Nobuyasu Sugimoto, and Jeanne Verrier
Capital flow management measures (CFMs) can be part of the broader policy toolkit to help countries reap the benefits of capital flows while managing the associated risks. Their implementation typically requires that financial intermediaries verify the nature of transactions and the identities of transacting parties but is facing the rising challenge of crypto assets. Indeed, crypto assets have become a significant instrument for payments and speculative investments in some countries. They can be traded pseudonymously and held without identification of the residency of the asset holder. Many crypto service providers operate across borders, making supervision and enforcement by national authorities more difficult. The challenges posed by the attributes of crypto assets are compounded by gaps in the legal and regulatory frameworks. This paper aims to discuss how crypto assets could impact the effectiveness of CFMs from a structural and longer-term perspective. To preserve the effectiveness of CFMs against crypto-related challenges, policymakers need to consider a multifaceted strategy whose essential elements include clarifying the legal status of crypto assets and ensuring that CFM laws and regulations cover them; devising a comprehensive, consistent, and coordinated regulatory approach to crypto assets and applying it effectively to CFMs; establishing international collaborative arrangements for supervision of crypto assets; addressing data gaps and leveraging technology (regtech and suptech) to create anomaly-detection models and red-flag indicators that will allow for timely risk monitoring and CFM implementation.
Keywords:
capital flow management measures; CFMs; crypto assets; digital currencies; Regtech; Suptech; untraceable transactions; crypto exchanges; distributed ledger technology; Bitcoin; FINTECH note; asset holder; capital outflow restriction; crypto asset Adoption; crypto-asset exchange; Virtual currencies; Capital flow management; Blockchain and DLT; Capital flows; Anti-money laundering and combating the financing of terrorism (AML/CFT); Global
Cover IMF How To Notes
How to Implement Strategic Foresight (and Why)
Mr. Alberto Behar and Sandile Hlatshwayo
This note explains the value of strategic foresight and provides implementation advice based on the IMF’s experience with scenario planning and policy gaming. Section II provides an overview of strategic foresight and some of its tools. Scenario planning and policy gaming have been the Fund’s main foresight techniques so far, though other tools have been complementary. Accordingly, section III focuses on the scenario planning by illustrating applications before detailing the methods we have been using, while section IV describes policy gaming including the matrix policy gaming approach with which we have experimented so far. Section V summarizes the key points. In so doing, the note extends an invitation to those in the economics and finance fields (e.g., researchers, policymakers) to incorporate strategic foresight in their analysis and decision making.
Keywords:
risk-preparedness framework; Policy game; data IMF Library; guidance note; scenario planning; Futures; Stress testing; Emerging and frontier financial markets; COVID-19; Global
Cover IMF Working Papers
Financial Regulation, Climate Change, and the Transition to a Low-Carbon Economy: A Survey of the Issues
Mr. Dimitri G Demekas and Pierpaolo Grippa
There are demands on central banks and financial regulators to take on new responsibilities for supporting the transition to a low-carbon economy. Regulators can indeed facilitate the reorientation of financial flows necessary for the transition. But their powers should not be overestimated. Their diagnostic and policy toolkits are still in their infancy. They cannot (and should not) expand their mandate unilaterally. Taking on these new responsibilities can also have potential pitfalls and unintended consequences. Ultimately, financial regulators cannot deliver a low-carbon economy by themselves and should not risk being caught again in the role of ‘the only game in town.’
Keywords:
Financial stability; financial regulation; climate change; climate mitigation policy; low-carbon economy; energy transition; carbon price; green finance; United Nations climate change conference; policy coordination; unintended consequence; Climate change; Global