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)

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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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