In an opinion piece for the Financial Times, IMF's managing director Kristalina Georgieva highlights the Fund's new approach to advising emerging markets given their unique context and diversity of policies pursued by them. Initially, the integrated policy framework will focus on monetary policy, macroprudential policy, exchange rate interventions and capital flow measures. It will be expanded to include fiscal policy. Excerpts from the FT piece.
Our goal is to provide country-specific advice on the appropriate mix of policies needed to preserve growth and financial stability.
Our new “integrated policy framework” will reassess the costs and benefits of four tools — monetary policy, macroprudential policy, exchange rate interventions and capital flow measures — to help stabilise economies exposed to domestic and external shocks. Importantly, the “integrated” aspect of the new framework will capture how these tools interact with each other and with country circumstances.
The IMF’s current framework, grounded in more conventional economic thinking, broadly steers members towards using the exchange rate as a shock absorber. This approach provides a good approximation of how advanced economies adjust to external shocks and exchange rate movements. But it can miss important characteristics of emerging markets that alter their economies’ response to external shocks and may call for a different policy prescription.
New research indicates that while emerging markets are deeply integrated in global trade, their trade is disproportionately invoiced in dollars and consequently flexible exchange rates provide limited insulation. Similarly, while emerging markets are substantially integrated in global capital markets, their foreign debt is denominated extensively in dollars. That can cause exchange rates to become shock amplifiers as they can suddenly increase debt service costs and liabilities.
In fact, the striking diversity of policies pursued among economies could reflect their differing exposure to external shocks. Emerging markets also differ widely in the liquidity of their foreign exchange markets, which could affect the range of tools available to them for stabilisation.