Forewarned Is Forearmed: How the Early Warning Exercise Expands the IMF’s Surveillance Toolkit
IMF Blog, September 23, 2010
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Bibliographic details
- Authors: John Lipsky
- Published: September 23, 2010
Overview
- Author: John Lipsky
- Date: September 23, 2010
- Context: G-20 Finance Ministers in late 2008 tasked the IMF and the Financial Stability Board to jointly develop an Early Warning Exercise (EWE), to be ready by the IMF’s 2009 Istanbul Annual Meetings.
- Motivation: In the wake of the September 2008 onset of unprecedented financial turmoil, policymakers recognized that earlier danger signs had not been synthesized into an actionable warning. The EWE was intended to fill the analytical gap: produce an effective “call to arms” as threats emerge—but well before crises erupt.
Purpose and positioning within IMF surveillance
- The EWE complements traditional IMF surveillance (WEO, GFSR, Fiscal Monitor) by focusing on tail risks rather than the principal risks to the staff’s baseline global forecast.
- The EWE’s goal: identify the most relevant tail risks, demonstrate how their possible emergence could be recognized, and specify policy changes that would need to be implemented if they materialize.
- Rationale for IMF leadership: assessing macroeconomic and financial risks is a core Fund responsibility; the IMF’s macro-financial expertise, analytical talent and data resources, together with the FSB’s knowledge of financial regulation and supervision, are viewed as key and complementary ingredients.
Main features of the Early Warning Exercise
- Coverage:
- “Coverage is fairly comprehensive, including both advanced and emerging economies.”
- Work underway to extend the exercise to low-income countries and to deepen the understanding of how crises spread.
- Methodological approach:
- “Based on a holistic approach to assessing risk.”
- “Draws on various tools, rather than relying on a single crisis model.”
- Combines empirical analysis with forward-looking thinking, inputs from key policymakers and academics, in-depth real-world knowledge (e.g., from market practitioners), and seasoned judgment from IMF experts.
- Focus and limitations:
- “The EWE does not aim to predict the timing of crises, but rather to help prevent their occurrence and to limit their potential damage.”
- Primary purpose: identify as early as possible the buildup of underlying vulnerabilities that predispose a system to a crisis, so corrective policies can be implemented and contingency plans put in place.
- Objective of scenarios and warnings:
- Warnings should be “precise and compelling, consist of serious but plausible scenarios, outline the consequences of inaction, and lead to specific policy advice.”
- Avoid “fighting the last war” by broad consultation to capture emerging risks.
Communication, dissemination, and policy use
- Confidentiality:
- The content of the EWE is kept confidential to facilitate candid exchange of views and to avoid confusion regarding the Fund’s base case forecast.
- A newly released paper provides an overview of the design and methodological underpinnings of the EWE.
- Audience and use:
- Results have been presented to the Fund’s International Monetary and Financial Committee (IMFC).
- EWE analyses and conclusions are used as input in IMF staff bilateral discussions with country authorities.
- The main results and policy implications relevant for a country are typically presented and discussed, with the gist of such discussions reflected in documents relating to the annual Article IV consultations.
Findings and implications
- The EWE seeks to correct a major pre-crisis failure: the inability of analysts to “connect the dots” among vulnerabilities across the global financial system and to propose policy options to address them.
- By focusing on tail risks and underlying vulnerabilities, the EWE aims to enable earlier corrective policy action and better contingency planning.
Status and next steps
- The EWE “has been repeated several times” and “represents a work in progress.”
- IMF and FSB participants continue to refine the process and content.
- Ultimate task: “Make sure that available knowledge is focused systematically and effectively on reducing the risk of a new global crisis.”
Source: Forewarned Is Forearmed: How the Early Warning Exercise Expands the IMF’s Surveillance Toolkit — John Lipsky, September 23, 2010
Content in this bundle
- The IMF-FSB Early Warning Exercise - Design and Methodological Toolkit; September 1, 2010