Navigating External Shocks in Southeast Asia's Emerging Markets: Key Lessons and Challenges in Applying the IMF’s Integrated Policy Framework
Departmental Papers, September 23, 2024
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Bibliographic details
- Authors: Corinne C Delechat, Umang Rawat, Ara Stepanyan
- Published: September 23, 2024
- Series: Departmental Papers
- DOI: https://doi.org/10.5089/9798400285790.087
Context and scope
- Focus: South-East Asian emerging markets (Indonesia, Malaysia, Philippines and Thailand or ASEAN-4).
- Characteristic: Relatively small open economies highly susceptible to external shocks—both financial and real—that could induce large capital flows and exchange rate volatility and lead to foreign exchange market dysfunction.
- Policy frameworks: With the exception of Bank Negara Malaysia, ASEAN-4 central banks mostly have flexible inflation-targeting frameworks. Main policy objectives include medium-term price stability, sustainable economic growth, and financial stability.
- Pilot period: Central Banks in ASEAN-4 were early pilots in operationalizing the IMF’s Integrated Policy Framework (IPF) in 2022-23.
IPF approach and tools analyzed
- Multiple policy tools considered: monetary policy rate, macroprudential measures, foreign exchange intervention (FXI), and capital flow management measures.
- IPF framing: A systematic, frictions-based approach to analyze use of multiple tools to manage trade-offs across policy objectives.
- Analytical methods: IPF conceptual framework and a related quantitative model used to assess policy trade-offs in ASEAN-4 under adverse external shocks.
Key findings from IPF pilots and model applications
- Monetary policy role:
- Reaffirmed importance of using monetary policy to address persistent inflationary pressures stemming from real shocks.
- Importance of allowing the exchange rate to act as a shock absorber.
- Complementary role of FXI:
- Complementary use of FXI could improve trade-offs between price, financial, and output stability when economies face large and financial shocks that result in abrupt spikes in uncovered interest rate parity premia.
- FXI can be valuable where abrupt premia spikes create inefficiently tight financial conditions that could hurt growth or risk de-anchoring inflation expectations.
- Operational challenges identified:
- Assessing frictions and shocks that might justify FXI is difficult in practice.
- Country teams sometimes lacked sufficient information to adequately assess the extent of frictions.
- Time-varying nature of IPF frictions and non-linear effects of shocks complicate assessment of when benefits of complementary FXI outweigh its costs.
Policy implications and considerations
- Prioritize monetary policy to combat persistent, real-shock-driven inflation while permitting exchange rate flexibility to absorb shocks.
- Consider FXI as a complementary tool in circumstances of large financial shocks that cause abrupt uncovered interest rate parity premia spikes and materially tighten financial conditions.
- Strengthen data, diagnostics, and monitoring to better assess the extent and time variation of frictions relevant for FXI decisions.
- Recognize non-linearities: frameworks and operational guidance should account for time-varying frictions and non-linear shock effects when weighing FXI benefits against costs.
Publication and metadata
- Authors: Corinne C Delechat, Umang Rawat, Ara Stepanyan
- Publication date: September 23, 2024
- Series: Departmental Paper No 2024/007
- Pages: 44
- Volume: 2024
- Issue: 007
- DOI: https://doi.org/10.5089/9798400285790.087
- Stock No: DPEA2024NES
- ISBN: 9798400285790
- ISSN: 2616-5333
Source: Navigating External Shocks in Southeast Asia's Emerging Markets: Key Lessons and Challenges in Applying the IMF’s Integrated Policy Framework (Departmental Papers 2024, 007).
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