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IMF Executive Board Completes the Seventh Review of the Extended Arrangement under the Extended Fund Facility for Ukraine
March 28, 2025
Philippines: Macroeconomic Frameworks Technical Assistance: Scoping Mission
March 28, 2025
The International Monetary Fund (IMF) conducted a scoping mission in the Philippines to assess the macroeconomic forecasting capacity of the Department of Finance (DOF) and identify areas for capacity development. The mission found that the DOF lacks a comprehensive macroeconomic framework for consistent policy analysis and forecasting. Despite having a version of the IMF's Globally Integrated Monetary and Fiscal (GIMF) model, the DOF staff lacks the training to recalibrate or modify it. The mission recommends developing a simpler, customizable macroeconomic framework based on the Comprehensive Adaptive Expectations Model (CAEM) to enhance the DOF's analytical capabilities. This framework will support the DOF in conducting policy analysis, improving fiscal planning, and ensuring sustainable capacity development.
Fiscal Determinants of Domestic Sovereign Bond Yields in Emerging Market and Developing Economies
March 28, 2025
Domestic sovereign bonds have become a growing source of government financing in Emerging Market and Developing Economies (EMDEs). This paper investigates the role of fiscal policies in determining domestic bond yields, and how this relationship varies depending on the debt structure. Specifically, the analysis highlights the interaction of fiscal policy with banking sector leverage and foreign investor holdings for government debt. A 1 percentage point increase in expected primary deficits results in a persistent increase in 10-year domestic bond yield by around 36 basis points over 2.5 years, with larger effects observed during the COVID-19 pandemic. This contrasts with external bond spreads which are more sensitive to external and global risk factors. The greater the reliance on domestic banks for deficit financing, the stronger the impact of loose fiscal policy on domestic bond yields. The shift in domestic debt financing towards domestic banks after the pandemic implies that sovereign yields have been increasingly interlinked with domestic banks’ investment behavior implying potential financial sector risks in major EMDEs.
COMPD Comment: COMFAD to greenlight.
Covered Interest Parity in Emerging Markets: Measurement and Drivers
March 28, 2025
We study the behavior of Covered Interest Parity (CIP) deviations – aka the CIP basis - in Emerging Markets (EM). A major challenge in computing the CIP basis in EM’s lies in measuring local currency interest rates which are free of local credit risk. To do so, we construct a ‘purified’ CIP basis for eight major EM currencies using supranational bonds issued in EM local currencies and US dollar going back twenty years. We show that this ‘purified’ CIP basis aligns well with theory-implied predictions. In the cross-section and the timeseries, the basis correlates with fundamental forces driving supply and demand for dollar forwards. Shocks to global dollar funding costs, global intermediary’s balance sheet capacity, and the demand for dollar safe assets interact with currency-specific dollar hedging and funding needs in moving the CIP basis in EM’s.
Monetary Shocks and Labor Markets: Evidence from Online Job Vacancy Postings
March 28, 2025
Central banks conduct monetary policy to achieve price stability, but decisions also have effects on labor-market outcomes. In this paper, we identify exogenous monetary shocks with the ‘interest rate surprise’ approach based on high-frequency changes in forward-looking interest rates and use daily data on online job vacancy postings to investigate the impact of monetary policy on labor markets in three European countries (Estonia, Latvia and Lithuania) during the period 2018–2024. Our results indicate that monetary policy exerts significant and durable effects on labor-market conditions as measured by online job vacancy postings in our sample of countries. First, a contractionary (expansionary) monetary policy shock leads to a persistent decline (increase) in online job vacancy postings. Across all countries, the average effect amounts to about 2 percent in 15 days after a contractionary monetary policy shock (i.e., an unanticipated increase of 1 percentage point in short-term interest rates). Second, there is significant heterogeneity in the magnitude and persistence of how monetary policy affects the labor market across three countries in our sample, varying from 0.5 percent in Latvia to 2 percent in Estonia and 3.2 percent in Lithuania. Taken together, these results are both of direct concern for policymakers and important for the transmission of monetary policy.
Privacy Technologies & The Digital Economy
March 28, 2025
Ensuring that users and society-at-large derive the maximum benefit from digital technology requires active and open participation in the digital economy. However, such participation is not without risks and users may withhold or withdraw their active participation in response to such factors. One important reason for doing so is users’ privacy concerns, which may induce behavior that limits digital footprints in order to shield personal data from third parties and governments. Coupled with regulation, privacy technologies can help build trust in the digital economy. If designed and deployed appropriately, they could form the basis of trust in the digital economy. We offer three considerations for supervisors. First, they should understand the strengths and weaknesses of privacy technologies, and this primer aims to provide a foundational tool to achieve this. Second, domestic collaboration and international cooperation is indispensable to improving knowledge sharing and providing clarity regarding mandates and rules. Third, they need to understand the cybersecurity implications and tradeoffs in using privacy technologies.
Kingdom of the Netherlands-Aruba: Technical Assistance Report; Options for a New Rules-Based Fiscal Framework
March 28, 2025
This technical assistance (TA) mission on Fiscal Rules was conducted from October 31 to November 12, 2024. Public debt management is crucial for Aruba, particularly due to its economic reliance on tourism. Following the 2008 Global Financial Crisis, debt levels surged to over 70 percent of GDP, and the COVID-19 pandemic further exacerbated this, pushing debt to 112.3 percent in 2020. To address these issues, Aruba aims to reduce public debt to 50 percent of GDP by 2040 through fiscal tightening and revised fiscal rules. Key recommendations include simplifying fiscal rules, implementing a Medium-Term Fiscal Framework (MTFF), and enhancing institutional capacity for effective fiscal management. These measures are essential to ensure fiscal sustainability and economic resilience in Aruba.