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Global Economic Prospects: A Conversation with the IMF Chief Economist

January 29, 2023
Chief Economist Pierre-Olivier Gourinchas speaks about the global economic prospects and developments that shape our latest growth and inflation forecasts. Jan 31 at 8:30 PM ET | Feb 1 at 9:30 AM SGT

Gold as International Reserves: A Barbarous Relic No More?

January 27, 2023
After moving slowly downward for the better part of four decades, central bank gold holdings have risen since the Global Financial Crisis. We identify 14 “active diversifiers,” defined as countries that purchased gold and raised its share in total reserves by at least 5 percentage points over the last two decades. In contrast to the diversification of foreign currency reserves, which has been undertaken by advanced and developing country central banks alike, active diversifiers into gold are exclusively emerging markets. We document two sets of factors contributing to this trend. First, gold appeals to central bank reserve managers as a safe haven in periods of economic, financial and geopolitical volatility, when the return on alternative financial assets is low. Second, the imposition of financial sanctions by the United States, United Kingdom, European Union and Japan, the main reserve-issuing economies, is associated with an increase in the share of central bank reserves held in the form of gold. There is some evidence that multilateral sanctions imposed by these, and other countries have a larger impact than unilateral sanctions on the share of reserves held in gold, since the latter leave scope for shifting reserves into the currencies of other non-sanctioning countries.

Evaluating the Costs of Government Credit Support Programs during COVID-19: International Evidence

January 27, 2023
Advanced economies made available more than 5 trillion USD through government-supported credit guarantee and direct loan programs to provide lifelines to firms in the face of the COVID-19 pandemic. Notwithstanding the unprecedented scale of credit made available, an in-depth analysis of the fiscal consequences is missing, and the costs of these programs are not recognized in a transparent way. In this paper, we fill in an important aspect of the fiscal picture by estimating the subsidies that were provided by the largest credit guarantee programs introduced in 2020 in seven advanced economies. We estimate the subsidies on a fair value basis that provides a consistent and comprehensive upfront measure of cost. We explain the logic behind applying a fair value framework in a government context and compare it to alternative approaches. For the programs that we examine, total credit extended totaled 1.7 trillion USD. The subsidy element (cash-equivalent subsidy) is estimated to be 67 percent of loan principal on average (37 percent, excluding the US PPP), with a wide range across programs, from 12 to 100 percent. The variation is explained by differences across programs including eligibility criteria, loan terms, compensation to lenders, and other program design choices.

Carbon Policy Surprises and Stock Returns: Signals from Financial Markets

January 27, 2023
Understanding the impact of climate mitigation policies is key to designing effective carbon pricing tools. We use institutional features of the EU Emissions Trading System (ETS) and high-frequency data on more than 2,000 publicly listed European firms over 2011-21 to study the impact of carbon policies on stock returns. After extracting the surprise component of regulatory actions, we show that events resulting in higher carbon prices lead to negative abnormal returns which increase with a firm's carbon intensity. This negative relationship is even stronger for firms in sectors which do not participate in the EU ETS suggesting that investors price in transition risk stemming from the shift towards a low-carbon economy. We conclude that policies which increase carbon prices are effective in raising the cost of capital for emission-intensive firms.

Commercial Real Estate in Crisis: Evidence from Transaction-Level Data

January 27, 2023
During the past two decades, the commercial real estate (CRE) market has been impacted by major disruptions, including the global financial crisis and the Covid-19 pandemic. Using granular data from the U.S., we document how these crises have unfolded and elaborate on the role of heterogeneity and underlying shocks. Both a set of reduced-form approaches and a structural framework suggest a prominent role for demand-side local factors in the short run, along with significant shifts in preferences during crisis episodes. However, valuations become more closely linked to macro-financial factors over the long term. A one-standard deviation tightening in financial conditions is associated with a drop of about 3% in CRE prices in the following quarter, with a stronger impact on the retail sector and milder effects in states where household indebtedness is lower.

Nicaragua: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Nicaragua

January 27, 2023
Substantial pre-crisis buffers (primarily government deposits), prudent policies, and official external financial assistance helped Nicaragua recover well from a protracted downturn during 2018-2020 caused by the socio-political crisis of 2018, two major hurricanes in 2020, and the pandemic. Real gross domestic product (GDP) grew by 10.3 percent in 2021 and is projected to grow by 4 percent in 2022, despite hurricane Julia that affected the country in October. Inflation on an annual basis reached 11.4 percent in November 2022, mostly due to increases in import prices. The authorities introduced fiscal measures to mitigate the impact of the increases in oil and wheat prices, and also increased the reference interest rate. Bank deposits are growing strongly and reached the pre-crisis level (in Córdobas). Gross international reserves have doubled since end-2018 (to over US$4 billion; about 6 months of imports, excluding maquila).

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