Selected Issues Papers
IMF Selected Issues Papers are prepared by IMF staff as background documentation for periodic consultations with member countries.
2024
August 13, 2024
Exchange Rate Pass-Through to Inflation in Singapore: Singapore
Description: Singapore has addressed high inflation over the past years amid a tight labor market through several rounds of tightening of the exchange rate-based monetary policy. This paper estimates the exchange pass-through to inflation in Singapore with a particular focus on the role of labor market conditions. The paper first finds a strong exchange rate pass-through to inflation in Singapore, after accounting for the potential endogeneity of changes in the exchange rate. Further, it uncovers that labor market tightness dampens exchange rate pass-through and therefore could weaken monetary policy transmission. Overall, the results suggest that monetary policy should be more vigilant under a tight labor market condition. The paper then draws policy implications for taming inflation under tight labor market conditions.
August 1, 2024
Deep Dive on the Climate Transition for France: Macroeconomic Implications, Fiscal Policies, and Financial Risks
Description: Climate change presents an unprecedented long-term challenge to the French and global economy. While France has made significant progress towards reducing greenhouse gas emissions, important additional policy efforts will be needed to meet key mitigation targets. Decarbonization costs and risks can be significant, highlighting the need to identify efficient and equitable fiscal and regulatory policy options to meet emission goals. To accelerate the green transition and mitigate its costs, France has increasingly relied on green spending measures, which could be complemented by higher carbon pricing and other revenue-neutral schemes. Recycling of revenues via cash transfers could offset the price impact on lower-income households. Over the medium term, new measures for road transportation, such as distance-based charges, could also be considered. Ensuring a timely and orderly climate transition will be critical to mitigate the credit risk impact on banks. French banks should also continue to mitigate climate transition risks by integrating them into their governance, strategy, and risk management processes.
August 1, 2024
Options for Creating Fiscal Room for Investment and Other Spending Needs: Germany
Description: Germany needs substantially higher levels of public investment. At the same time, the country is facing rising pension, healthcare, long-term care, and defense expenditures. If Germany were eventually to ease moderately its national fiscal rules, as recommended by IMF staff, this would create some fiscal room but would not be sufficient on its own. This paper therefore explores options for Germany to generate additional fiscal room by reducing its public spending and increasing its revenues, while minimizing the associated costs to the economy. To aid this exploration, this paper also examines areas where Germany’s spending and revenue levels stand out in international comparison. The options for generating fiscal room include: (i) finding efficiencies in healthcare spending; (ii) stabilizing the finances of the social security system; (iii) eliminating environmentally harmful subsidies; (iv) raising revenues from goods and services taxes; (v) raising property taxes and closing loopholes in inheritance taxes; and (vi) earning higher returns on the government’s financial assets.
August 1, 2024
Financial Stability Risks from Commercial Real Estate: Germany
Description: Following post-pandemic tightening of monetary policy in advanced economies, commercial real estate (CRE) markets have been under pressure globally, including in Germany. This paper explores the channels of CRE impact for the German financial sector, and the potential size of impact for individual German banks based on publicly available data. It finds that German banks, in aggregate, are adequately capitalized and sufficiently liquid to absorb potential losses. However, elevated CRE-related credit risks suggest the need for close monitoring of some individual institutions, conservative capital distributions, adequate loan-loss provisions, retention of macroprudential buffers, and testing of financial safety arrangements.
July 31, 2024
State-Owned Enterprises in Mozambique: Current Situation and Policy Options
Description: This paper documents the role of state-owned enterprises (SOEs) in Mozambique, discusses some important fiscal issues, and makes the case for improvements in governance and transparency. A first step is to enhance timely and regular collection of data that is easily accessible to better assess the performance of SOEs and raise awareness about associated fiscal costs and risks.
July 24, 2024
Upskilling the UK Workforce: United Kingdom
Description: The UK workforce has larger and more chronic skills gaps than in most peer countries, with surveys reporting widespread recruitment difficulties, with implications for output, in high-skill sectors like digital and software, manufacturing, medicine and life sciences, teaching, and construction. This partly reflects declines in primary and post-secondary education outcomes (particularly science scores, over the past two decades) and in workplace training and apprenticeships, particularly for the young. Moreover, the recent increase in non-EU migrants has not fully offset the adverse impact from Brexit on the availability of needed skills, including because smaller firms face more recruitment hurdles with regard to non-EU hires. Against this backdrop, there is an urgent need to upskill the UK workforce, both by building on ongoing efforts, as well as additional concrete measures to: (i) encourage students and young workers to join and excel in STEM; (ii) ensure adequate vocational and on the job training, particularly for the young; (iii) retain the talent produced by UKs world leading universities; (iv) upskill the existing labor force; and (v) facilitate attraction and retention of in-demand skills through adjustments to the visa regime.
July 24, 2024
Public Spending Pressures in the UK: United Kingdom
Description: This paper characterizes UK public spending pressures over a ten-year horizon and their implications for public deficits and debt levels. The analysis is based on a ‘bottom-up’ scenario for total public expenditure, that includes, inter alia, implementation of the NHS Long-Term Workforce Plan, public investment to support the Balanced Pathway to Net Zero, and state pension spending under the Triple Lock policy. This scenario is approximately consistent with IMF staff’s baseline projection for the medium term (to FY2029/30) shown in the 2024 Article IV consultation staff report, which assumes real growth in Departmental Expenditure Limits (DEL) of two percent per year after FY2024/25. Assuming revenue stabilizes in FY2028/29 at the level projected by IMF staff (40.8 percent of GDP), public debt does not stabilize over ten years, reaching 101.3 percent of GDP by FY2034/35. Stabilizing debt will require the primary balance to be 0.8–1.4 ppts of GDP higher per year (on average after FY2024/25), depending on the time horizon for stabilization (5 or 10 years) and the target probability of debt stabilization (50 or 75 percent).
July 24, 2024
Construction Planning Reforms for Growth and Investment: United Kingdom
Description: The UK construction planning system is overly stringent and the localized and discretionary system of decision-making makes it highly unpredictable. It hinders new construction (both residential and commercial) and infrastructure projects, restricting labor mobility (as workers stay trapped in suboptimal jobs due to unaffordable housing in areas with better prospects). It also raises investment costs for businesses, who often endure long and uncertain wait times or are forced to relocate to suboptimal locations. International and domestic experience suggests that a concerted overhaul of the system is needed, focusing on systemic reforms that reduce discretionary decision-making in granting permissions. While this is politically difficult, tangible progress is possible around a few key areas: (i) broader geographic and rules-based decision-making for business and large residential developments to reduce uncertainty for investors; (ii) digitalized and standardized plans at the local level which are, additionally, binding for designated growth areas; (iii) careful review of scope to release Green Belt land of little environmental or amenity value near stations with easy access to major cities; and (iv) targeted incentives (to overcome new builds resistance) and resources to local authorities (including skilled staff to facilitate compliance with new environmental requirements)
July 24, 2024
Monetary Policy Issues in the UK: United Kingdom
Description: After hiking rates 14 consecutive times between December 2021 and August 2023 to arrest above-target inflation, the Bank of England (BoE) has held rates at 5.25 percent since then. As the BoE prepares for easing, this paper examines three concurrent monetary policy questions: (a) how have the macroeconomic and financial effects of BoE monetary tightening during the current cycle compared with experiences in other major advanced economies (AEs), and with previous UK tightening cycles; (b) what is the impact of US Fed decisions on UK monetary transmission, and the attendant implications thereof for BoE communications; and (c) how do model-based predictions of UK monetary policy paths (which seek to stabilize inflation and the output gap) compare with staff’s recommended path in the 2024 Article IV consultation. We find that (a) monetary transmission has largely mirrored previous episodes (and experiences in other major AEs), with the most notable exception of the mortgage channel, which has been slower due to a higher share of fixed-rate mortgages; (b) an outsized impact of Fed announcements on UK financial markets places a premium on BoE communications in a context where the BoE may diverge from the Fed; and (c) optimal rate path predictions are close to staff’s recommended path, although if the BoE attached a high weight to concerns about a prolonged period of above-target inflation leading to de-anchoring of inflation expectations, a slower pace of cuts would be warranted.
July 1, 2024
Sustainable Path to Inclusive Growth in Japan: How to Tackle Income Inequality?
Description: Market income inequality in Japan has been on a steady rise since the 1980s, and is now close to the OECD average. Gross and disposable income inequality, on the other hand, have risen much less but remain higher relative to several comparator countries. This paper employs inequality index decompositions by income source using household panel survey data from 2010-19 to identify the factors driving income inequality in Japan. Results indicate that while increase in the employment of females and the elderly in the last decade has helped lower income inequality, this has been offset by them being mostly employed in low-paid part-time nonregular jobs. Rapid aging of the population has also exacerbated income inequality over time. Moreover, while fiscal redistributive effects of social transfers are found to be a somewhat equalizing force, its impact on inequality is relatively weaker.