## 7. Directors agreed that the Fund should be at the forefront of financial spillover analysis ## Source details **Canonical URL:** [7. Directors agreed that the Fund should be at the forefront of financial spillover analysis](https://www.imf.org/-/media/files/publications/pp/2020/english/ppea2020029.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2020/english/ppea2020029.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2020/english/ppea2020029.pdf.json) --- ### Summary of Board Reactions - Directors noted initiatives taken over the past decade to assess spillovers, improve financial risk assessments, develop the macroprudential policy toolkit, and advise countries on capital flow volatility. - Several Directors called for greater attention to challenges faced by emerging market and developing countries from financial spillovers and capital flow volatility, including additional work on policy mixes in “source” countries. - A few Directors stressed that all countries are responsible for sound macroeconomic policies, mindful of spillover and spillback effects, and that the Fund should provide advice to handle cross-border effects and enhance resilience. - Many Directors felt a code of conduct for central banks may be impractical and unduly constrain domestic policy implementation. - Directors encouraged using insights from ongoing spillover work and the IPF as input for the CSR, including approaches to better address spillovers and options to strengthen surveillance modalities. ### Key Implementation Actions and Timelines - CSR proposals: - CSR will present proposals to further strengthen spillover analysis and coverage in surveillance as part of establishing surveillance priorities (see proposed action in Annex I). - Key CSR recommendations on spillovers: - (i) provide the Spillover Task Force (STF) an explicit mandate to periodically identify systemic spillover issues in a consistent format and timeframe to inform bilateral surveillance and commission analytical work across the institution; - (ii) close data gaps to better equip teams to identify spillover channels and impacts; and - (iii) leverage the Fund’s unique role in enhancing dialogue between spillover-receiving and spillover-producing countries. - Concrete guidance will be formulated in the updated Guidance Note on Surveillance following the CSR. - Work on how to manage capital flows will be informed by the forthcoming IEO evaluation of IMF advice on capital flows; the issues paper was discussed at the Board on July 23, 2019. - Integrated Policy Framework (IPF) development: - Continue development of a novel analytical framework combining models, empirical analysis, and case studies to enhance understanding of policy tool interactions, including monetary policy, foreign exchange intervention, macro-prudential policies, and capital flow management measures. - IPF development (by SPR, RES, MCM) will provide members, particularly those exposed to volatile capital flows and spillovers, with a more systematic assessment of the appropriate policy mix. - Staff updated the Board on October 7, 2019 on the IPF work program, which includes work on innovative models with complex financial frictions to help assess the policy mix. - Informal Board engagements to update progress on the IPF will take place in the Spring and Summer of 2020. - A cross-departmental advisory group on the IPF has been formed to exchange views and coordinate advice and work on the IPF. - RES implementation work: - Undertake a model comparison exercise examining transmission of shocks to financial conditions and other shocks relevant during the GFC, and the role of the zero lower bound in amplifying those shocks. - Provide an analytical contribution to the next ESR on the role of stock imbalances (structure of international investment positions) as a determinant of sudden stops and external crises. - GFSR and thematic coverage: - The GFSR will continue to discuss financial spillovers regularly. - In Fall 2020, the GFSR will include a chapter on financial spillovers from UMP. - External engagement and workshops: - Hold Workshops on the Institutional View (IV) in Practice with country authorities at the 2020 Spring and Annual Meetings to ensure Fund advice is well understood and to allow deeper discussion of trade-offs with authorities. - Convene annual spillover workshops coordinated by RES jointly with the ECB, Bank of England, and the BIS (started in 2019). The April 2019 workshop focused on financial spillovers and policies to address them; going forward the workshop will continue to address financial spillovers in depth and the profile will be raised, including by regularly inviting a keynote speaker. ### Recommendation Linkages and Accountability (selected follow-up items) - CSR to present proposals to further strengthen spillover analysis and coverage in Article IV surveillance (April 2020). [Accountability: SPR] - Update the Board on progress on the IPF (Spring and Summer 2020). [Accountability: SPR, RES, MCM] - The GFSR will include a box or chapter on UMP financial spillovers (Fall 2020). [Accountability: MCM] ### Resource Implications - Near-term resource implications are expected to be marginal. - Several actions have already been incorporated into departmental work plans and budgets for FY2020; additional costs from this MIP are expected to be minor in the near term, assuming absence of material risks. - Resource implications of the External Advisory Group (EAG) will be clarified depending on modalities and members; costs are expected to be minimal as members may not require compensation, similar to the EAG for the CSR. - Discussions of medium-term resource needs for prioritizing monetary policy work and building further expertise, as well as those related to CSR proposals on spillovers and traction, will be initiated in the context of the FY2021–23 Medium-term Budget, with changes implemented over time. *Source: ppea2020029 - 7. Directors agreed that the Fund should be at the forefront of financial spillover analysis* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and scope - This Management Implementation Plan (MIP) was prepared before COVID-19 became a global pandemic and resulted in unprecedented strains in global trade, commodity and financial markets. The actions in the plan and their timeline, therefore, do not reflect the implications of these developments and related policy priorities. - The MIP proposes actions in response to the Board-endorsed recommendations provided by the Independent Evaluation Office (IEO) in the context of its assessment of the IMF’s Advice on Unconventional Monetary Policies (UMP). - Staff has already begun responding to some of the IEO recommendations and several of the actions proposed in this MIP reflect initiatives in train. - Most actions have already been incorporated into departmental work plans and budgets for fiscal year FY2020. Medium-term resource implications, including those related to the Comprehensive Surveillance Review (CSR), will be discussed in the context of the FY2021–23 budget as work progresses. ### Overarching objectives of the MIP - Strengthen in-house expertise on monetary policy. - Deepen work on UMP and related policies through rigorous research and broad consultations. - Further strengthen financial spillover analysis and increase prominence of Fund work on spillovers. - Explore ways to enhance the Fund’s traction in bilateral surveillance as part of the CSR. ### Timing and approvals - Document date: April 6, 2020. - Approved by Christopher Erceg and Kristina Kostial. - Prepared by the Monetary and Capital Markets and Strategy, Policy and Review (SPR) Departments in collaboration with other Departments. Staff team led by Hélène Poirson (SPR) with Erik Lundback and Gohar Minasyan (SPR) under guidance of Tam Bayoumi and Maria Gonzalez (SPR) and Gaston Gelos (MCM). ### Executive Board reaction (summary) - The Executive Board welcomed the IEO findings and recommendations and appreciated insights on improving the IMF’s contribution, traction with member countries, and timeliness of advice on monetary policy issues. - The Managing Director broadly supported the general thrust of the IEO’s recommendations. --- ### Recommendation 1 — Build a small core group of top monetary policy experts - Board view: - Directors saw merit in building expertise in monetary policy to enhance the Fund’s role. - They generally agreed that a core group of top, broadly-diverse monetary experts with experience in policymaking would better provide practical guidance and support institutional learning. - Directors welcomed the recent establishment of a new unit on monetary policy modelling in MCM as a welcome first step and stressed collaboration with major central banks and the BIS. - Key implementation actions and milestones: - The Monetary Policy Modeling Unit (MMU) in MCM has been fully staffed, with a goal of 6.5 FTE, as of end-2019. - MMU oversight: Deputy Director with deep monetary policy expertise; staff with expertise in monetary policy and macroeconomic modeling and practical experience including at central banks. - MMU will develop model-based frameworks to analyze monetary policy transmission, foreign exchange intervention, interactions with macroprudential policy tools, UMP and spillovers; frameworks to be flexibly applied to individual countries and capacity development, complemented by empirical work and case studies. - MCM’s Monetary and Macroprudential Policies division has recently hired staff with strong research and policy track records in monetary policy. - MCM plans to bring in visiting monetary policy experts on a regular basis. - An interdepartmental Monetary Policy Advisory Group will be created by mid-2020 to facilitate collaboration with area departments. - An External Advisory Group (EAG) of high-level practitioners and experts will be convened; the remit and composition of the EAG will be published in September 2020. - Research Department (RES) is developing an IASOC toolkit to assess monetary policy frameworks along 5 dimensions (Independence, Accountability, Policy Strategy, Operational Framework and Communication Strategy) with the data and methodology paper to be published by Fall 2020. - A Board paper on Cross-Border Implications of Digital Currencies will look into implications for monetary policy transmission of innovations such as Libra in Summer 2020 (MCM, RES, SPR, and LEG). - The annual Michel Camdessus Lecture event is planned to be broadened to a full-day conference focused on monetary policy issues including UMP and spillovers. - HR Strategy will continue to be rolled out through FY2021, including launch of a talent inventory and an expert track to create positions for experts in critical areas. - Institute for Capacity Development (ICD) actions: - Revamp courses and capacity development work for country officials. - Increase the number of periodic events on monetary policy topics under the Internal Training Seminars from two currently to six in 2020. - Gear the Open Forum Series to focus further on the interaction between monetary policy and markets under unusual circumstances. - Continue the 5-day monetary policy course taught by a leading academic each year. --- ### Recommendation 2 — Deepen work on costs and benefits of UMP to develop a playbook - Board view: - Directors broadly supported developing a playbook by deepening work on costs and benefits of UMP and related policies, drawing on the Fund’s cross-country experience. - Directors emphasized avoiding over-prescriptive approaches and preserving flexibility for country-specific conditions. - Many Directors supported updating the 2013 paper on global impact and challenges of UMP and the 2015 paper on monetary policy and financial stability. - Key implementation actions and milestones: - Development of a playbook requires broad stock-taking of experience with increasingly complex UMP and a long-term strategy; the MMU and Monetary and Macroprudential Policies Division near-term work program is a first step. - Outputs of the work program will help develop a “recession playbook” and will be the focus of a Board briefing in mid-2021. - MMU model work: - (i) a small open economy model capturing key features of monetary policy transmission and foreign exchange intervention; - (ii) a medium-sized model that incorporates macroprudential policy tools (e.g., to analyze housing risk issues); - (iii) a larger-scale model allowing analysis of unconventional monetary policies, including negative rates as well as spillovers and possible spillbacks from such policies. - RES economic modeling division will continue to contribute to the analysis of monetary policy, including quantifying the impact of monetary easing on global growth. - April 2020 WEO Chapter 1 will present work on factors driving persistently low long-term interest rates. - April 2020 GFSR will include a box on the effectiveness of negative interest rates. - Staff will contribute to discussions of monetary policy framework reviews by the U.S. Federal Reserve, the ECB, the Bank of England, and the Bank of Canada on topics including shifts in strategy (e.g., average inflation targeting or symmetric inflation bands), use of new tools to increase policy space, and ways to improve forward guidance and communication. - Thematic briefing on macrofinancial and distributional impacts of monetary policy and implications for the role of monetary policy relative to fiscal policy will be presented to the Board by May 2020 by SPR, MCM, and RES; the briefing will include analysis of how fiscal policy could mitigate adverse distributional effects of monetary easing. - MCM will lead a Board briefing on UMP and related policies in late 2020 based on research and consultations. - MCM has initiated a stocktaking paper on negative interest rates to be completed in mid-2020. - Work is ongoing on transforming the MFPT into a Central Bank Transparency (CBT) code; the CBT paper will be presented to the Board in May 2020. --- ### Recommendation 3 — Be at the forefront of financial spillover analysis and capital flow advice - The Executive Summary lists this recommendation among the four from the IEO (full implementation detail continues beyond the supplied excerpt). - The MIP highlights strengthening financial spillover analysis as part of the CSR’s identification of spillovers as a key surveillance priority and increasing prominence through high-level workshops and the Global Financial Stability Report (GFSR). --- ### Staffing, budgets, and resource implications (summary) - Near-term resource implications are expected to be minimal as most actions have been incorporated into departmental work plans and budgets for FY2020. - Medium-term resource implications, including those related to the CSR, will be discussed in the context of the FY2021–23 budget as work progresses. - Specific staffing/HR items: - MMU staffing goal: 6.5 FTE as of end-2019. - HR Strategy roll-out through FY2021 including talent inventory and expert track. --- ### Planned Board and public outputs (selected items and timing) - April 2020 WEO Chapter 1: work on factors driving persistently low long-term interest rates. - April 2020 GFSR: box on effectiveness of negative interest rates. - Board paper on Cross-Border Implications of Digital Currencies: Summer 2020. - Remit and composition of External Advisory Group (EAG) to be published: September 2020. - Thematic Board briefing on macrofinancial and distributional impacts of monetary policy: May 2020. - MCM-led Board briefing on UMP and related policies: late 2020. - Stocktaking paper on negative interest rates (MCM): mid-2020. - Board briefing on development of a “recession playbook”: mid-2021. - CBT paper (transforming MFPT into Central Bank Transparency code): May 2020. - Internal training and outreach: increase Internal Training Seminars on monetary policy topics from two to six in 2020. --- *MIP in Response to IEO Evaluation—IMF Advice on Unconventional Monetary Policies, April 6, 2020* ### 7. Directors agreed that the Fund should be at the forefront of financial spillover analysis ### 7. Directors agreed that the Fund should be at the forefront of financial spillover analysis ### Summary of Board Reactions - Directors noted the many initiatives the Fund had taken over the past decade to assess spillovers, improve financial risk assessments, develop the macroprudential policy toolkit, and advise countries on how to deal with capital flow volatility. - A number of Directors called on the Fund to pay greater attention to the challenges faced by emerging market and developing countries from financial spillovers and capital flow volatility, including additional work on the appropriate mix of policies in “source” countries, be it advanced or emerging market economies. - A few Directors stressed that all countries have the responsibility to implement sound macroeconomic policies, mindful of both spillover and spillback effects, and that the Fund has a role to play in providing advice to its membership on how to handle cross-border effects and enhance resilience. - Many Directors felt that developing a code of conduct for central banks may be impractical and unduly constrain policy implementation in pursuit of domestic objectives. - Directors encouraged using insights from ongoing work on spillovers and the IPF as input for the CSR, including consideration of approaches to better address spillovers and options to strengthen surveillance modalities. ### Key Implementation Actions and Timelines - CSR proposals: - The CSR is presenting proposals to further strengthen spillover analysis and coverage in surveillance as part of its work on establishing surveillance priorities for the Fund (see proposed action in Annex I). - Key CSR recommendations on spillovers include: - (i) providing the Spillover Task Force (STF) an explicit mandate to periodically identify systemic spillover issues in a consistent format and timeframe to inform bilateral surveillance and commission analytical work across the institution to investigate them; - (ii) closing data gaps to better equip teams to identify spillover channels and impacts; and - (iii) leveraging the Fund’s unique role in enhancing dialogue between spillover-receiving and spillover-producing countries. - Concrete guidance will be formulated in the updated Guidance Note on Surveillance following the CSR. - Work on how to manage capital flows will be informed by the forthcoming IEO evaluation of IMF advice on capital flows, which will lead to concrete steps to be implemented. The issues paper was discussed at the Board on July 23, 2019. - Integrated Policy Framework (IPF) development: - The IPF work will continue to develop a novel analytical framework combining models, empirical analysis, and case studies to enhance understanding of key policy tools and their interactions, including monetary policy, foreign exchange intervention, macro-prudential policies, and capital flow management measures. - Development of the IPF (by SPR, RES, MCM) will provide members, particularly those exposed to volatile capital flows and spillovers of policies, with a more systematic assessment of the appropriate mix of policies. - Staff updated the Board on October 7, 2019 on the IPF work program going forward, which includes work on innovative models with complex financial frictions to help assess the policy mix. - Informal Board engagements to further update the Board on progress on the IPF work will take place in the Spring and Summer of 2020. - A cross-departmental advisory group on the IPF has been formed to exchange views and experiences to coordinate advice and work on the IPF. - RES implementation work: - A model comparison exercise that looks at transmission of shocks to financial conditions and other shocks that were relevant during the GFC, and the role of the zero lower bound in amplifying those shocks. - An analytical contribution to the next ESR on the role of stock imbalances (structure of international investment positions) as an important determinant of sudden stops and external crises. - GFSR and thematic coverage: - The GFSR will continue discussing financial spillovers regularly. - In Fall 2020, the GFSR will include a chapter on financial spillovers from UMP. - External engagement and workshops: - Workshops on the Institutional View (IV) in Practice will be held with country authorities at the 2020 Spring and Annual Meetings to ensure Fund advice is well understood and to allow deeper discussion of trade-offs with authorities. - The Fund will convene annual spillover workshops coordinated by RES jointly with the ECB, Bank of England, and (started in 2019) the BIS. The April 2019 workshop focused on financial spillovers and policies to address them. Going forward, the workshop will continue to address financial spillovers in depth and the profile will be raised, including by regularly inviting a keynote speaker. ### Recommendation linkages in Annex I (selected follow-up items) - CSR to present proposals to further strengthen spillover analysis and coverage in Article IV surveillance (April 2020). [Accountability: SPR] - Update the Board on progress on the IPF (Spring and Summer 2020). [Accountability: SPR, RES, MCM] - The GFSR will include a box or chapter on UMP financial spillovers (Fall 2020). [Accountability: MCM] ### Resource Implications - Commitments outlined would have marginal resource implications in the near term. - Several actions proposed in this MIP have already been incorporated into departmental work plans and budgets for FY2020; therefore, additional costs resulting from this MIP are expected to be minor in the near term as staff resources are expected to be fully sufficient to implement these commitments absent the realization of material risks. - Resource implications of the EAG will be clarified depending on specific modalities and members; costs are expected to be minimal as members may not need to be compensated for their participation, similar to the practice with the EAG for the CSR. - Discussions of medium-term resource needs for prioritizing monetary policy work and building further expertise as well as those related to the CSR proposals on spillovers and traction are expected to be initiated in the context of the FY2021–23 Medium-term Budget, with changes to be implemented over time. *Source: ppea2020029 - 7. Directors agreed that the Fund should be at the forefront of financial spillover analysis* --- _Source: https://www.imf.org/-/media/files/publications/pp/2020/english/ppea2020029.pdf_