Jonathan D. Ostry

Exchange rate regimes and the stability of the international monetary system

The member countries of the International Monetary Fund collaborate to try to assure orderly exchange arrangements and promote a stable system of exchange rates, recognizing that the essential purpose of the international monetary system is to facilitate the exchange of goods, services, and capital, and to sustain sound economic growth. The paper reviews the stability of the overall system of exchange rates by examining macroeconomic performance (inflation, growth, crises) under alternative exchange rate regimes; implications of exchange rate regime choice for interaction with the rest of the system (external adjustment, trade integration, capital flows); and potential sources of stress to the international monetary system.

Coping with the Crisis; Policy Options for Emerging Market Countries

This chapter outlines policies to help solve the debt overhang and bring about recovery in both groups of countries. The current financial turmoil is confronting emerging market economies with two shocks: a ‘sudden stop’ of capital inflows resulting from the global deleveraging process, and a collapse in export demand associated with the global slump. A key ingredient appears to be greater official financing to expand the ‘policy space’ available to emerging market economies (EME) to pursue supportive macroeconomic policies—including, in countries with large debt overhangs, by helping to meet the fiscal outlays associated with the resolution of that overhang. An important first step is to ensure an adequate framework to facilitate rapid debt workouts. Debt restructuring mechanisms can provide greater scope for monetary easing by reducing the negative repercussions of exchange rate depreciation on unhedged balance sheets. Depending on the available fiscal space, expansionary fiscal policy should also be deployed to support economic activity.

Multilateral Aspects of Managing the Capital Account

The financial crisis has again brought home the profound financial linkages across countries, often manifest in highly volatile capital flows. This volatility has prompted interest in multilateral principles to guide policies in both source and recipient countries. This paper discusses the analytical underpinnings of such principles, and attempts to draw implications from the analytics for the desirability of multilateral coordination of country policies. We argue that the global welfare implications of capital account regulations, or policies that mimic their effects, are threefold. First, spillovers from such policies do not necessarily have normative implications: if policies are justified from a national standpoint (in terms of reducing domestic distortions), under a range of conditions they should be pursued even if they give rise to cross-border spillovers. Second, however, if policies in one country exacerbate existing distortions in other countries, and it is costly for other countries to respond, then multilateral coordination of unilateral policies is likely to be beneficial. Third, coordination may require borrowers to reduce inflow controls or, much thornier, agreement by lenders to partially internalize the risks from excessively large or risky outflows. *Corresponding author: jostry@imf.org 1 We thank Olivier Blanchard, Marcos Chamon, Raphael Espinoza, and David Lipton for helpful comments on earlier versions of this paper, and Jane Haizel for assistance. Views expressed are the authors’ and should not be attributed to the IMF.

Macrofinancial Linkages : Trends, Crises, and Policies

Macro-financial linkages have long been at the core of the IMFs mandate to oversee the stability of the global financial system. With the advent of the economic crisis, the Fund has drawn on this research in order to contribute to critical debates on the nature of appropriate policy responses at both the national and multilateral levels. This volume brings together some of the best writing by IMF economists on macro-financial issues, and highlights the issues and approaches that have guided IMF thinking in an area that makes up an increasingly important component of the IMFs overall remit. The chapters in the volume fit into three broad themes: financial crises and boom-bust cycles; financial integrations, financial liberalization, and economic performance; and policy issues relating to macroeconomic policy and the corporate and financial sectors - including domestic and external financial liberalization.

Economic Gains From Gender Inclusion: New Mechanisms, New Evidence

While progress has been made in increasing female labor force participation (FLFP) in the last 20 years, large gaps remain. The latest Fund research shows that improving gender diversity can result in larger economic gains than previously thought. Indeed, gender diversity brings benefits all its own. Women bring new skills to the workplace. This may reflect social norms and their impact on upbringing and social interactions, or underlying differences in risk preference and response to incentives for example. As such, there is an economic benefit from diversity, that is from bringing women into the labor force, over and above the benefit resulting from more (male) workers. The study finds that male and female labor are imperfect substitutes in production, and therefore gender differences in the labor force matter. The results also imply that standard models, which ignore such differences, understate the favorable impact of gender inclusion on growth, and misattribute to technology a part of growth that is actually caused by women’s participation. The study further suggests that narrowing gender gaps benefits both men and women, because of a boost to male wages from higher FLFP. The paper also examines the role of women in the process of sectoral reallocation from traditional agriculture to services and the resulting effect on productivity and growth. Because FLFP is relatively high in services, sectoral reallocation along development paths serves to boost gender parity and productivity.

Taming the Tide of Capital Flows

While always episodic in nature, capital flows to emerging market economies have been especially volatile since the global financial crisis. After peaking at

Growth-Equity Trade-offs in Structural Reforms

680 billion in 2007, flows to emerging markets turned negative at the onset of crisis in 2008, then rebounded only to recede again during the U.S. sovereign debt downgrade in 2011. Since then, flows have continued to swing wildly, leaving emerging market policy makers wondering whether they can put in place policies during the inflow phase that will soften the blow when flows subsequently recede. This book offers the first comprehensive treatment of policy measures intended to help emerging markets contend with large and volatile capital flows. The authors, all IMF experts, explain that, in the spirit of liberalization and deregulation in the 1980s and 1990s, many emerging market governments eliminated capital inflow controls along with outflow controls. By 2012, however, capital inflow controls were again acknowledged as legitimate policy tools. Focusing on the macroeconomic and financial-stability risks associated with capital flows, the authors combine theoretical and empirical analysis to consider the interaction between monetary, exchange rate, macroprudential, and capital control policies to mitigate these risks. They examine the effectiveness of various policy tools, discuss the practical considerations and multilateral implications of their use, and provide concrete policy advice for dealing with capital inflows.

Redistribution, Inequality, and Growth

Do structural reforms that aim to boost potential output also change the distribution of income? We shed light on this question by looking at the broad patterns in the cross-country data covering advanced, emerging-market, and low-income countries. Our main finding is that there is indeed evidence of a growth-equity tradeoff for some important reforms. Financial and capital account liberalization seem to increase both growth and inequality, as do some measures of liberalization of current account transactions. Reforms aimed at strengthening the impartiality of and adherence to the legal system seem to entail no growth-equity tradeoff—such reforms are good for growth and do not worsen inequality. The results for our index of network reforms as well as our measure of the decentralization of collective labor bargaining are the weakest and least robust, potentially due to data limitations. We also ask: If some structural reforms worsen inequality, to what degree does this offset the growth gains from the reforms themselves? While higher inequality does dampen the growth benefits, the net effect on growth remains positive for most reform indicators.