Global Financial Stability Report, October 2022: Navigating the High-Inflation Environment

Global Financial Stability Report, October 11, 2022

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Global Financial Stability Report, October 2022: Navigating the High-Inflation Environment

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Bibliographic details

• Published: October 11, 2022
• Series: Global Financial Stability Report
• DOI: https://doi.org/10.5089/9798400219672.082

Elevated financial stability risks and market conditions

• Global financial stability risks have increased amid a series of cascading shocks.
• Markets have been extremely volatile, and a deterioration in market liquidity appears to have amplified price moves.
• In Europe, the energy crisis is contributing to a worsening outlook.
• In China, the property sector remains a key source of vulnerability.
• Dollar strength, rising interest rates, and monetary policy tightening are central drivers of current market stress.

Chapter 1 — Central banks, tightening risks, and debt stress

• Analyzes the policy response of central banks to high inflation and the risks of a disorderly tightening of financial conditions.
• Highlights debt distress among emerging and frontier markets as a critical vulnerability.
• Notes that a deterioration in market liquidity has amplified price moves, increasing the likelihood of stress transmission across markets.
• Identified market structure and liquidity dynamics as contributors to extreme volatility and potential amplification of shocks.

Chapter 2 — Narrowing the climate financing gap in EMDEs

• Examines how to narrow the climate financing gap in emerging market and developing economies.
• Emphasizes that climate policies— including carbon pricing, climate disclosures, and transition taxonomies—are crucial for enabling private climate finance.
• States that innovative financial instruments can help scale up private climate finance.
• Stresses that the public sector—including multilateral development banks—will have to play a key supporting role in mobilizing climate finance.

Chapter 3 — Open-end investment funds and asset-market fragilities

• Analyzes the contributions of open-end investment funds to fragilities in asset markets.
• Finds that open-end investment funds play a key role in financial markets, but those offering daily redemptions while holding illiquid assets can amplify the effects of adverse shocks.
• Mechanisms of amplification include raising the likelihood of investor runs and asset fire sales, contributing to volatility in asset markets and potentially threatening financial stability.
• Mentions liquidity mismatch, redemptions, swing pricing, and antidilution levies as relevant fund features and policy considerations.

Policy-relevant themes and instruments highlighted

• Monetary policy tightening and monetary policy uncertainty are central to the report’s analysis of financial stability risks.
• Climate-related policies and market frameworks (carbon markets, climate disclosures, transition taxonomies) are identified as enablers of private climate finance.
• Innovative instruments and blended finance are noted as tools to scale climate finance, with multilateral development banks playing a supporting role.
• Regulatory and market-structure responses to mitigate run risks in open-end funds are implied priorities (e.g., liquidity management tools, swing pricing, antidilution levies).

References

• https://www.imf.org/en/publications/gfsr
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