Experts Advise Continued Institutionalization of Macroeconomic Frameworks
According to the International Monetary Fund (IMF), emerging markets with robust frameworks are better positioned to navigate risk aversion shocks. However, experts warn that these economies must continue institutionalizing their macroeconomic frameworks to enhance resilience.
Benefits of Strong Frameworks
Emerging markets with solid frameworks enjoy greater policy flexibility and face a lower risk of sudden capital outflows causing market downturns. These economies have demonstrated resilience against global shocks through good practices, such as:
- Independent central bank operations
- Anchored inflation expectations
- Reduced foreign exchange market interventions
- Robust and independent fiscal institutions enabling countercyclical responses
Uneven Resilience Among Emerging Markets
The IMF’s World Economic Outlook (WEO) acknowledges unequal resilience to shocks among emerging markets. Some countries have stronger frameworks than others, and while currency interventions can offer temporary relief, they are often too costly to replace or postpone necessary efforts in anchoring inflation expectations and reducing balance sheet deleveraging.
IMF Insights from Annual Meetings
During the IMF’s Annual Meetings preparatory discussions, a roundtable featured Joyce Chang from J.P. Morgan, Carmen Reinhart (crisis finance expert), Arindam Roy, and Zhao Zhang. Reinhart emphasized that any country, regardless of development level, can be exposed to shocks at some point.
Key Questions and Answers
- What does it mean for emerging markets to have robust frameworks? Having solid macroeconomic frameworks allows emerging markets to better manage risks, maintain policy flexibility, and reduce vulnerability to sudden capital outflows.
- Why is it important for emerging markets to continue institutionalizing their frameworks? Institutionalization strengthens resilience against global shocks, enabling countries to better navigate risk aversion events and maintain stability.
- What are some good practices identified by the IMF for enhancing resilience? Good practices include independent central bank operations, anchored inflation expectations, reduced foreign exchange market interventions, and robust fiscal institutions for countercyclical responses.
- Why is balance sheet deleveraging a concern for emerging markets? Balance sheet deleveraging refers to accelerated asset or currency depreciation, which can negatively impact emerging markets’ stability and require costly interventions.
The upcoming IMF and World Bank Annual Meetings 2025 will take place from October 14-18 in Washington, D.C.
