Understanding macro-financial linkages

June 2022

Low-income countries (LICs) need financial development as well as financial stability. Financial depth is key to mitigating shocks like the adverse impacts under the ongoing COVID-19 pandemic. How to transition to deeper financial markets while maintaining financial stability is a key policy question on which LIC policymakers seek advice—see for instance deliberations at the March 2016 regional workshop at the Bank of Tanzania. The work under this topic has made significant progress in tackling the issues of financial inclusion, macroprudential policies, and capital flows. What follows is a brief description of how the topic on understanding macro-financial linkages has evolved over the four phases of the FCDO-IMF partnership on research on the macroeconomics of LICs.

  • Under phase 3 (April 2017 to March 2020), the research aimed to improve the quality of the advice that can be offered by means of a much more thorough investigation of macro-financial linkages in LICs. The first part of the project involved the development of a new and extensive data set on banking structure, lending and macro-prudential policies in selected developing countries. Granular data—at bank-, sector-, and loan-level—was used in the empirical analysis. The second part of the project focused on a quantitative assessment of financial sector policy frameworks which includes macroprudential policy, microprudential bank supervision, and crisis preparedness and management. Some of the work produced under phase 3 include a high-level conference on Financial Inclusion: Drivers and Real Effects, and research papers on Borrowing Costs and The Role of Multilateral Development Banks: Evidence from Cross-Border Syndicated Bank Lending and another paper on Mobilization Effects of Multilateral Development Banks. For a list of all the work produced under phase 3, see the report for year 6, year 7, and year 8 of the FCDO-IMF partnership.
  • Under the current phase—phase 4 (April 2020 to March 2025), we will examine the main drivers of the persistently high cost of remittances—which are projected to largely decline during the COVID-19 pandemic, although they are now a major source of financing for many of LICs—identifying where policy interventions may be justified to address barriers to flows. Another set of work will look into the nexus between financial and economic developments. For a list of all the work produced under phase 4, see the upcoming reports for years 9-13.

For a list of products that have been produced under each of the four phases of the FCDO-IMF partnership, see the box on outputs on the left-hand side.