Twitter: @MarkusEconomistIntro: MARKUS BRUNNERMEIER
Markus’ Zoominar intro Previous/future webinars Larry Summers Vaccine acceleration, US-China, Resilience.. Bill Dudley The Fed’s longer-term challenges
Speakers
Global Symmetry to Asymmetry
Global Symmetric shock Asymmetric – worse for EMDE? How to reduce asymmetric amplification for EMDE?
5/29/2020 3
Capital outflow from EMDE
Why did it stabilize in April? Should EMDE borrow from IMF to stem against them?
5/29/2020 4
Integrated Policy Framework: SA Asset Price = E[PV(cash flows)] + E[PV(service flows)]
dividends/interest Service flows
a. Relax collateral constraints (Lagrange multiplier)b. Safe asset: [good friend analogy] When one needs funds, one can sell at stable price
… since others buy Partial insurance through retrading - market liquidity!
c. Money (narrow): relax double-coincidence of wants
Higher Asset Price = lower expected return
Problem: b, c might burst like a bubble Multiple equilibria:
5/29/2020 5Brunnermeier, Merkel, Sannikov (2020) “An Safe Asset Approach to IPF”
Gov. bond
Narrowmoney
Integrated Policy Framework: SA Asset Price = E[PV(cash flows)] + E[PV(service flows)]
dividends/interest Service flows
a. Relax collateral constraints (Lagrange multiplier)b. Safe asset: [good friend analogy] When one needs funds, one can sell at stable price
… since others buy Partial insurance through retrading - market liquidity!
c. Money (narrow): relax double-coincidence of wants
Higher Asset Price = lower expected return
Problem: b, c might burst like a bubble Multiple equilibria:
5/29/2020 6
Gov. bond
Narrowmoney
Integrated Policy Framework: SA Asset Price = E[PV(cash flows)] + E[PV(service flows)]
dividends/interest Service flows
a. Relax collateral constraints (Lagrange multiplier)b. Safe asset: [good friend analogy] When one needs funds, one can sell at stable price
… since others buy Partial insurance through retrading - market liquidity!
c. Money (narrow): relax double-coincidence of wants
Higher Asset Price = lower expected return
Problem: b, c might burst like a bubble Multiple equilibria: [safe asset tautology]
5/29/2020 7
Gov. bond
Narrowmoney
Can EMDE offer safe asset?
With capital controls𝑟𝑟𝑓𝑓 = 𝜌𝜌 + 𝐸𝐸 𝑔𝑔𝑐𝑐 − 𝜎𝜎𝑐𝑐2
Risk-free rate = time preference rate + growth - volatility For log utility If primarily idiosyncratic risk, 𝑔𝑔 = 𝐸𝐸 𝑔𝑔𝑐𝑐
𝑟𝑟 − 𝑔𝑔 = 𝜌𝜌 − �𝜎𝜎2
safe asset service flow𝑟𝑟 < 𝑔𝑔 ⇔ 𝜌𝜌 < �𝜎𝜎2 run gov. debt PONZI SCHEME
but limit expansion
5/29/2020 8
… but if safe asset status is wobbly
With capital control𝑟𝑟 + risk premium < 𝑔𝑔
Negative if safe asset appreciates in times of crisis Positive if safe asset status might burst
EMDEs’ challenge!
Nextwithout capital controls US Treasury competes as
safe asset
5/29/2020 9
Measure:Sovereigncredit spread
Competition with US Treasury
EMDE safe asset status is even more wobbly𝑟𝑟 + RISK PREMIUM < 𝑔𝑔
𝑟𝑟 > 𝑟𝑟$
Note: risk is endogenous due to self-fulfilling expectations So is the price of risk
⇒ risk premium = price of risk (exog. + endogenous risk) Multiple equilibria (invites speculative attacks)
5/29/2020 10
Jammed in between!
Measures to defend safe asset
Policy measures to defend EMDE safe asset statusa. US Fed rate cut 𝑟𝑟$ reduces jamming! 2020-03-03 Fed cut 𝑟𝑟$
b. Counteract possible (synchronized) speculative attacks 2020-03-23 Swap lines (Fed, ECB, …) FX interventions using $-reserves 2020-04-06 FIMA Treasury Repo facility (for EMDE) 2020-04-22 IMF short term liquidity line (SLL)
c. Capital control (outflow) & MacroPru measures
5/29/2020 11
IPF & Dilemma
IPF To assess consistency of policy mix
Monetary, MacroPru, FX Intervention, Capital Controls
Dilemma not Trilemma Theoretical foundation for Rey (2017) Monetary policy is constrained/jammed
despite flexible exchange rates (unlike in Mundell-Fleming Trilemma)
5/29/2020 12
In sum
Health shock may be symmetric across the globebut due to safe asset fragility – becomes asymmetric
Calls for different global financial architecture (GloSBies) Less ex-post intervention required More automatic self-stabilizing system
5/29/2020 13
Poll 01:
1. EMDE (grants vs. liquidity support) a. EMDEs need grants not liquidity due to debt overhang problemb. Liquidity support is essential since liquidity problems morph
into solvency issues
2. EMDE shoulda. Should defend their currency and safe asset status
(using their reserves/IMF liquidity life lines)b. Let currency go and make foreign investor take the hit?
3. Debt to EMDEs should be a. Bailed outb. Restructured
5/29/2020 14
End of MARKUS’ INTRODUCTORY REMARKS
Now Please ask questions in Q&A box
International Monetary FundMay 29, 2020
The Great Lockdown through the Global Lens of the IMF
Gita GopinathChief Economist
Truly Global Crisis
Global Health Shock
100
1000
10000
100000
1000000
0 5 10 15 20 25 30 35 40 45 50 55
Cases doubleevery day…
…every 2 days…every 3 days
…every week
USA
ITA
HKG
KOR
JPN
RUS ESP
DEU
AE: Cumulative confirmed cases(log scale; Last update: May 20)
Days since 100th confirmed case →
100
1000
10000
100000
1000000
0 5 10 15 20 25 30 35 40 45 50 55
Cases doubleevery day…
…every 2 days…every 3 days
…every week
CHN
RUS BRA
PER
TURRUS
IND IDN
THA
EGY
VNM
IRN
EMDE: Cumulative confirmed cases(log scale; Last update: May 20)
Days since 100th confirmed case →
Source: John Hopkins University.
0
20
40
60
80
100
120
Jan-20 Feb-20 Mar-20 Apr-20 May-20
China France Germany Inida Italy Japan U.S. Argentina
Brazil Indonesia India Mexico Russia Turkey South Africa Saudi Arabia
Sources: Hale, Thomas, Sam Webster, Anna Petherick, Toby Phillips, and Beatriz Kira (2020). Oxford COVID-19 Government Response Tracker, Blavatnik School of Government; and IMF staff calculations.
Oxford Stringency index(index; 0 to 100; 100 most stringent)
A Global Lockdown
A Multi-faceted External ShockCommodity prices(Jan 2, 2020 = 100)
Sources: Bloomberg, L.P., Argus, IIF, Haver Analytics, Thomson Reuters Datastream, and IMF staff calculations.
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0 11 22 33 44 55 66 77 88 99 110
GFC (Sep, 2008)COVID-19 (Mid-Feb, 2020)Taper Tantrum (May, 2013)
5/25
Portfolio flows to EMs 1/(percent of GDP; days since crisis start)
0
20
40
60
80
100
120
Jan-20 Feb-20 Mar-20 Apr-20 May-20
Metal Oil Natural Gas
5/22
Jan. 20(COVID19 in China)
Feb. 24(COVID19 outside China)
Mar. 6(OPEC+ breakdown)
Oil price decomposition(cumulative log difference*100)
-110
-90
-70
-50
-30
-10
10
3/4/2020 4/4/2020 5/4/2020
Demand (74%)Supply (26%)Oil price
Deeper & Broader than the Global Financial Crisis
Source: WEO and IMF staff calculations
Real GDP growth(Y/Y, percent)
0
10
20
30
40
50
60
70
90 95 00 05 10 15 20
PPP weight of countries in recessionCountries with per capita growth <-4%
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
Great Lockdown 2020 Global Financial Crisis 2019
AE EM
No country spared
Common Features of the Economic Impact
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
SWE NOR DNK DEU FRA ITA EuroArea
Sources: Markit; Swedbank; Haver Analytics; and IMF staff calculations.
PMI: Services (index; February-April 2020 changes)
PMI: Manufacturing(index; February-April 2020 changes)
Uniquely Large Hit to Services
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
SWE DEU FRA ITA Euro Area
0
10
20
30
40
50
60
IND
ITA
FRA
GBR
TUR
ESP
EUA
IDN
RUS
DEU
CAN
BRA
USA
MEX
KOR
JPN
AUS
CHN
GLO
BAL
February March April
Sources: IMF, World Economic Outlook; IMF, Global Data Source; and Haver Analytics.
PMI: Services - business activity (index; >50 = expansion; sa)
PMI: Manufacturing - output (index; >50 = expansion; sa)
9
A Worldwide Drop in Services
0
10
20
30
40
50
60
IND
ESP
FRA
ITA
EUA
RUS
GBR
DEU
AUS
JPN
USA
BRA
CHN
GLO
BAL
February March April
Sources: IMF, World Economic Outlook; IMF, Global Data Source; Consensus Economics; Haver Analytics; and IMF staff calculations.
Large Supply Shocks, Muted Inflation
Core CPI inflation(percent change; year-on-year)
-202468
101214161820222426
08 10 12 14 16 18 20
United States Japan Euro AreaChina Brazil IndonesiaMexico Russia TurkeySouth Africa
May 2020
Headline CPI inflation expectation: 1-year forecast(percent change; year-on-year)
-2
0
2
4
6
8
10
12
08 10 12 14 16 18 20
United States Japan Euro AreaChina Brazil IndiaIndonesia Mexico Russia
April 2020
Financial Markets: Disconnect?
50
60
70
80
90
100
110
1/1/2020 2/1/2020 3/1/2020 4/1/2020 5/1/2020
S&P 500 IndexS&P BSE SENSEX IndexFTSE/JSE Africa All Share IndexFTSE Emerging IndexShanghai Stock Exchange Composite IndexIbovespa Brasil Sao Paulo Stock Exchange Index
Equity market index(Jan 1 2020=100)
Change in Sovereign Bond Spreads
0200400600800
100012001400160018002000
Ecua
dor
Ukra
ine
Dom
inic
an R
epub
licSr
i Lan
kaPa
kist
anAr
gent
ina
Vene
zuel
aKa
zakh
stan
Gabo
nGh
ana
El S
alva
dor
Indi
aH
unga
rySo
uth
Afric
aLe
bano
nUr
ugua
yM
yanm
arTr
inid
ad a
nd T
obag
oCo
lom
bia
Turk
eyPo
land
Russ
iaSe
rbia
GFC (March 31 2009 less Sep 19 2008)
Covid-19 (May 22 2020 less Dec 31 2019)
Source: IMF, World Economic Outlook, IFS, Bloomberg. Ecuador Change in Spread under Covid is 3250 bps.
basis points
Exchange Rate Movements
0%
10%
20%
30%
40%
50%
Ukra
ine
Pola
nd
Hun
gary
Serb
ia
Icel
and
Russ
ia
Mex
ico
Turk
ey
Ugan
da
Braz
il
Nig
eria
Czec
h Re
publ
ic
Colo
mbi
a
Alge
ria
Indo
nesia
Jam
aica
Israe
l
Sout
h Af
rica
Kore
a
New
Zea
land
Aust
ralia
Arge
ntin
a
Urug
uay
Bots
wan
a
Croa
tia
Tanz
ania
Tuni
sia
Keny
a
Iran
Bulg
aria
GFC (March 31 2009 less Sept 19 2008) C19 (May 26 2020 less Dec 31 2019)
Exchange rates(percent change vis-à-vis USD, + is depreciation)
5/22
Source: IMF, World Economic Outlook, IFS.
Sources: IMF, World Economic Outlook; IMF, Global Data Source; IMF Covid Tracker; IFS; Haver Analytics; and IMF staff calculations.1/ Total of 66 emerging markets and 33 largest advanced economies.
11
Monetary Policy: Accommodative Across the BoardG-20+: Monetary policy measures(percent of countries)
0
10
20
30
40
50
60
70
80
90
100
0
10
20
30
40
50
60
70
80
90
100
Loosened Cutpolicyrate
Providedliqudity
AE EM
Unconventional monetary policy
AE and EM with Policy Rate <=0.5%(percent) 1/
87.9
12.1
0
10
20
30
40
50
60
70
80
90
100
AE EM
Sources: IMF, World Economic Outlook; IMF, Global Data Source; and Haver Analytics.
Fiscal PolicyG20 fiscal policy: Announced fiscal measures in G-20 economies (percent of GDP)
Informality: Proportion of informal employment in non-agricultural employment(percent; harmonized series)
0
10
20
30
40
50
60
70
80
90
100
EM LIDC
Median 25th percentile 75th quartile
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
5
5.1
5.2
0
5
10
15
20
25
30
35
MEX
TUR
ARG
RUS
IDN
CHN
SAU
IND
BRA
CAN
ZAF
KOR
ESP
AUS
USA
FRA
JPN
GBR
ITA
DEU
G20
(rhs)
Spending and revenue measuresLoans, equity and guarantees
Fiscal cost of a 2-month transfer to informal workers will be 2.2-5.7% of GDP.
Multilateralism
• Health Externalitieso Vaccine production and distribution
• Beggar-thy-neighbor
• The Great Lockdown – could it lead to Great Protectionism?
Looking Forward, Next steps
Profound Uncertainty about the Recovery
Source: IMF staff estimates.
4
Global: Real GDP path (index; 2019 Real GDP normalized to 0)
92
94
96
98
100
102
104
106
108
19 20 21
Longer outbreak in 2020
New outbreak in 2021
Longer outbreak in 2020 plus a newoutbreak in 2021April 2020 WEO
Jan 2020 WEO
Policies for the re-opening phase
• Minimize health uncertainty– Widespread testing, contact tracing, masks: least economically disruptive
– Phased re-opening; well-communicated, targeted approach to reopening
– Countries should be open to different strategies and tradeoffs
– Global effort for production and distribution of medical supplies, vaccines.
Policies for the re-opening phase
• Support to workers and firms will need to evolve– In peak crisis - keep firms and workers matched: Short-term work
subsidies (Germany), grants to firms conditional on maintaining employment.
– In reopening/recovery:»Ease reallocation: This requires labor market flexibility»Wage/Hiring subsidies»Case for corporate solvency support will also weaken; with the possible
exception of strategic or systemic firms and industries »Public investment that is job rich: Infrastructure investment that is
green can both be job rich and benefit the planet. – A new generation of temporary automatic stabilizers
Policies for the re-opening phase
• Continue to ensure stability of financial system; critical spending needs of developing economies are met; adequate international liquidity
– IMF: Emergency financing for 59 countries so far (over100 countries requesting); debt service relief, short term liquidity line; precautionary credit line
–G20 debt relief initiative– FX swap lines– More will likely be needed
Opportunities and challenges
4
•Technology and innovation to raise productivity•Climate change• Inclusive growth•Fintech/Digital economy•Mainstream epidemic preparation•Global Cooperation
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