{
  "title": "Multi-Track Monetary Policies in Advanced Economies: What This Means for Asia",
  "publication": "IMF Blog, April 27, 2015",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2015/04/27/multi-track-monetary-policies-in-advanced-economies-what-this-means-for-asia",
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  "summary": "Publication: James Daniel, Rachel van Elkan — April 27, 2015",
  "sections": [
    {
      "heading": "External position and stability",
      "content": "- Publication: James Daniel, Rachel van Elkan — April 27, 2015\n- Since mid-2014, diversity and divergence in countries’ economic situations, policies and performance have dominated global economic discussions, producing divergent monetary policies among major advanced economies.\n- Major policy actions:\n  - Bank of Japan and the European Central Bank have started significant expansions of their balance sheets.\n  - U.S. Federal Reserve has ended its bond-buying program and is expected to start raising rates.\n- Exchange rate outcome highlighted: these actions contributed to a sharp depreciation of the Yen and the Euro against the U.S. dollar (see chart 1)."
    },
    {
      "heading": "Impact on the region",
      "content": "- Overall effects of advanced-economy monetary divergence:\n  - Actions by the Bank of Japan and European Central Bank would tend to create capital inflows into Asia (excluding Japan) and appreciation pressure.\n  - Prospective action by the Fed would tend to create the opposite (capital outflows and depreciation pressure).\n- Recent capital flow pattern:\n  - Most countries in the region have experienced capital outflows rather than inflows in recent months.\n  - Main exception: India, which has received substantial inflows.\n- Currency movements:\n  - Most currencies in the region have appreciated in real effective exchange rate (REER) terms, but depreciated against the U.S. dollar.\n- Chart 2 groupings and observations:\n  - China/Hong Kong SAR/India/Indonesia/Philippines/Thailand — large REER appreciation and little depreciation versus the U.S. dollar.\n    - The increase for China (15%) has been particularly sharp, reflecting its link to the U.S. dollar, and follows on from a trend 5% annual appreciation for the last 10 years.\n    - Note: Indonesia’s REER appreciation is inflated by the recent reduction in fuel subsidies.\n  - Korea/Singapore — little REER change and some depreciation versus the U.S. dollar.\n  - Australia/New Zealand/Malaysia — large depreciation versus the U.S. dollar and, for Australia and Malaysia, significant REER depreciation.\n- External position vs. REER outcomes:\n  - Countries with external positions stronger than implied by fundamentals have tended to see REER appreciation (example: China).\n  - Conversely, countries with weaker external positions have tended to see REER depreciation (example: Australia).\n  - Exceptions noted:\n    - Group 2 countries (Korea, Singapore) and Malaysia have seen little or no REER appreciation despite strong external positions.\n    - Some Group 1 countries (Indonesia, India, Hong Kong SAR, Thailand) have seen significant REER appreciation despite having balanced, or weaker, external positions.\n- Role of commodity prices and trade balances:\n  - Since June, the sharp fall in the price of oil and most other commodities has raised many countries’ trade balances.\n  - Malaysia, Indonesia, Australia, and New Zealand have lost significant export revenue from lower commodity prices (helping explain, for example, Malaysia’s currency depreciation).\n- Inflation impact:\n  - The fall in commodity prices together with REER appreciations across most economies is pushing down inflation (see chart 5).\n  - Inflation outcomes by country: very low levels in China, Korea, New Zealand; negative inflation in Thailand, Singapore.\n  - Core inflation has tended to move less, but generally in the same direction."
    },
    {
      "heading": "The potential tensions",
      "content": "- Main tensions from advanced-economy policy actions:\n  - Weakening exports\n    - Expectation: export volume growth to hold up across the region overall.\n    - Risk: stronger currencies could weaken external demand, lower overall economic growth, and exacerbate internal imbalances.\n    - Country-specific effects on internal imbalances (measured by the output gap):\n      - Only Australia and the Philippines: recent REER movements go in the direction of reducing internal imbalances.\n      - Thailand, China, Hong Kong SAR: output projected to remain well below potential, which strong REER appreciation will tend to exacerbate (see chart 6).\n  - Financial instability\n    - Risks vary greatly across the region.\n    - Example risks:\n      - Many corporates have borrowed in U.S. dollars (example: Indonesia); a stronger U.S. dollar will make debt service more costly.\n      - India’s large capital inflows could lead to significant financial volatility if they reverse (as during the 2013 “taper tantrum”).\n    - Policy concern: if countries significantly loosen monetary policy to offset the contractionary impact of stronger currencies, this could foster excessive credit growth."
    },
    {
      "heading": "Need for flexible monetary policy response",
      "content": "- Recent policy responses:\n  - Many countries have cut interest rates (see chart 7).\n  - Several countries have taken other measures, for example, India accumulated international reserves to strengthen buffers ahead of potential increased global financial volatility.\n- Recommended policy stance:\n  - Monetary policy should generally continue to respond flexibly if exchange rate and capital flow pressures persist.\n  - Macro-prudential policy should be the first line of defense for addressing financial stability concerns.\n  - The specific response should depend on individual country circumstances.\n\nIMF blog post: Multi-Track Monetary Policies in Advanced Economies: What This Means for Asia — James Daniel, Rachel van Elkan — April 27, 2015\n\n---\n\n\n References\n\n- https://www.imf.org/wp-content/uploads/2015/04/asia-central-banking-multi-track-central-banking1.jpg\n- https://www.imf.org/wp-content/uploads/2015/04/asia-central-banking-multi-track-central-banking2.jpg\n- https://www.imf.org/wp-content/uploads/2015/04/asia-central-banking-multi-track-central-banking3.jpg\n- https://www.imf.org/wp-content/uploads/2015/04/asia-central-banking-multi-track-central-banking4.jpg\n- https://www.imf.org/wp-content/uploads/2015/04/asia-central-banking-multi-track-central-banking5.jpg\n- https://www.imf.org/wp-content/uploads/2015/04/asia-central-banking-multi-track-central-banking6.jpg\n- https://www.imf.org/wp-content/uploads/2015/04/asia-central-banking-multi-track-central-banking7.jpg\n\nSource: https://www.imf.org/en/blogs/articles/2015/04/27/multi-track-monetary-policies-in-advanced-economies-what-this-means-for-asia"
    }
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    "Authors: James Daniel, Rachel van Elkan",
    "Published: April 27, 2015",
    "Publication: James Daniel, Rachel van Elkan — April 27, 2015",
    "Since mid-2014, diversity and divergence in countries’ economic situations, policies and performance have dominated global economic discussions, producing divergent monetary policies among major advanced economies.",
    "Major policy actions:",
    "Exchange rate outcome highlighted: these actions contributed to a sharp depreciation of the Yen and the Euro against the U.S. dollar (see chart 1).",
    "Overall effects of advanced-economy monetary divergence:",
    "Recent capital flow pattern:",
    "Currency movements:",
    "Chart 2 groupings and observations:",
    "External position vs. REER outcomes:",
    "Role of commodity prices and trade balances:",
    "Inflation impact:",
    "Main tensions from advanced-economy policy actions:",
    "Recent policy responses:",
    "Recommended policy stance:",
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