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This paper analyzes a global map of dollar exposures and examines the relationship between net dollar exposures, defined as the difference between dollar assets and liabilities, and covered interest parity (CIP) deviations. We find that the cross-sectional relationship is significantly negative in advanced economies but positive in emerging markets. CIP deviations represent the hedging cost that foreign holders of dollar assets or liabilities incur to manage exchange rate risk. To explain, we develop a model in which the CIP deviations are determined by the demand and the supply side of hedging. The negative correlation in advanced economies can be explained by the variations in hedging demand. Larger net dollar exposures increase the hedging demand, raising hedging costs (reflected as more negative CIP deviations) and producing a negative correlation. In contrast, the positive correlation in emerging markets is explained by the supply side of the hedging market. Limited hedging supply leads to wider CIP deviations (more negative), encouraging firms to borrow in U.S. dollars rather than local currencies, thereby reducing net dollar exposures and generating a positive correlation.
This paper presents the IMF’s systemwide stress testing approaches, which cover multiple financial sub-sectors and their clients. Developing these tools is crucial for identifying cross-sector and cross border amplification channels and enhancing policy responses, as recognized by the international financial stability community. The paper reviews classic and modern theories and operational methods for analyzing systemic liquidity risks that impact numerous institutions simultaneously, illustrating how shocks can spread through banks, nonbank financial institutions (NBFIs), and market-based finance via runs, redemptions, margin and collateral calls, fire sales, price dynamics, and disruptions in core markets. It details two base IMF tools—an Excel-based flow-of-funds framework and investment fund liquidity analysis with fire sale and market-impact dynamics—and their application and enhancement within Financial Sector Assessment Programs (FSAPs) across various countries.
This paper develops a quarterly projection model for Korea with an integrated fiscal block, enabling analysis of monetary-fiscal interactions. The model is validated through historical decompositions and forecast evaluation. Scenario analysis comparing dynamics with and without debt-stabilizing fiscal rules reveals a fundamental trade-off: rules generate short-run procyclicality but prevent permanent debt drift. Without rules, temporary nominal GDP movements cause lasting debt-to-GDP changes. For Korea, facing age-related spending pressures, a medium-term fiscal framework could safeguard sustainability.
Public debt and wealth concentration have co-moved persistently across advanced economies and historical periods, defying standard theories of wealth inequality, particularly given that rising inequality has coincided with falling real interest rates in recent decades. I develop a stylized Diamond model with household heterogeneity and progressive taxation to formalize how public debt, through its tax burden, endogenously dictates tax progressivity and thereby affects the wealth distribution. In this framework, permanent debt shocks alter tax progressivity depending on the macroeconomic regime, with debt expansions increasing progressivity when interest rates are high but reducing it when interest rates are low. The resulting impact of public debt on wealth inequality is nonlinear in the overall level of the tax burden, disequalizing below a threshold and equalizing above it. Cross-country empirical evidence supports these predictions and shows that public debt is a quantitatively important, and often dominant, driver of postwar wealth inequality, with sizable effects transmitted primarily through the tax burden. These findings establish the distribution of the tax burden as a primary driver of long-run wealth inequality, and public debt as a central mediating channel through which structural shocks, such as population aging or artificial intelligence, propagate to the wealth distribution.
Authors probe complex issues to shed light on global economic challenges
After restoring stability, Argentina needs to turn hard-won gains into lasting prosperity
Sustained rebalancing requires policy action in both surplus and deficit countries
Stronger oversight, better data, and deeper coordination are needed to safeguard faster and more interconnected markets
With the rise of more expansive investment models, it is time to renew focus on sound legal frameworks
Less demand, more production, and inventory drawdowns prevented a larger price spike. A quick supply recovery is essential to avoid further damage to the global economy
