Normalization of Global Financial Conditions: The Implications for Brazil
IMF Working Papers, September 3, 2015
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- Normalization of Global Financial Conditions: The Implications for Brazil
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Bibliographic details
- Authors: Troy D Matheson
- Published: September 3, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513588117.001
Executive summary and context
- Global financial conditions are poised to tighten further as the global recovery proceeds.
- Monetary policy normalization is characterized as a healthy global development as growth continues to recover in advanced economies.
- Financial spillovers seen during the taper episode—which started with the announcement in May 2013 of possible tapering of U.S. asset purchases—hint at potential challenges for Brazil.
- The Fed’s communications related to normalization have improved significantly since the taper episode.
- At present, a rise in Fed Funds rate in 2015 is widely anticipated by markets—arguably the most widely anticipated tightening of monetary policy in history.
- Brazil could benefit from tighter global financial conditions associated with improved global prospects, but bouts of heightened uncertainty about the future course of monetary policy cannot be ruled out.
- Correct diagnosis of the underlying reasons behind tighter global financial conditions is crucially important for Brazil.
- Adverse spillovers can be mitigated by strengthening policy frameworks and fundamentals.
Key findings and analysis
- Taper episode (May 2013 announcement of possible tapering of U.S. asset purchases) produced notable financial spillovers relevant for Brazil.
- Improvements in the Fed’s communications since the taper episode have reduced some sources of uncertainty.
- Market expectations at the time of the paper indicated a rise in the Fed Funds rate in 2015.
- The net effect on Brazil of tighter global financial conditions can be positive (via improved global prospects) or negative (via bouts of heightened uncertainty).
Policy implications and recommendations
- Strengthen policy frameworks and fundamentals to mitigate adverse spillovers.
- Accurately diagnose the underlying drivers of tighter global financial conditions to design appropriate domestic policy responses.
- Monitor external monetary policy communications and market expectations closely given their potential to generate episodes of heightened uncertainty.
Subjects and analytical methods highlighted
- Subjects: Central bank policy rate, Exchange rates, Financial institutions, Financial services, Foreign exchange, Sovereign bonds, Yield curve.
- Keywords: asset, asset purchase, bond yield, Central bank policy rate, Economic news, Exchange rates, Global, Interest rates, monetary policy normalization, monetary policy shock, nominal exchange rate, rate, Sovereign bonds, Treasury bond yield, U.S. sovereign bond yield, Vector-autoregression, WP, Yield curve.
Source: Troy D Matheson, "Normalization of Global Financial Conditions: The Implications for Brazil", IMF Working Papers 2015, 194 (2015), September 3, 2015.
Content in this bundle
- Normalization of Global Financial Conditions: The Implications for Brazil — Section 1