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The COVID-19 pandemic is causing an unprecedented worldwide
economic contraction, leading central banks to reduce interest
rates to historically low levels and making unconventional monetary
policies-including "low for long" interest rates and asset
purchases-increasingly common. Arguably, however, the policies
implemented are efficient because they encourage increased
risk-taking, and they may have, if unintentionally, increase
medium- and long-run macro-financial vulnerabilities. This paper
argues that the resulting trade-offs need to be carefully accounted
for in monetary policy models and outlines how that can be achieved
in practice.
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Stress testing at the IMF (Paperback)
Tobias Adrian, International Monetary Fund: Monetary and Capital Markets Department, James Morsink
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R686
Discovery Miles 6 860
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Ships in 12 - 17 working days
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This paper explains specifics of stress testing at the IMF. After a
brief section on the evolution of stress tests at the IMF, the
paper presents the key steps of an IMF staff stress test. They are
followed by a discussion on how IMF staff uses stress tests results
for policy advice. The paper concludes by identifying remaining
challenges to make stress tests more useful for the monitoring of
financial stability and an overview of IMF staff work program in
that direction. Stress tests help assess the resilience of
financial systems in IMF member countries and underpin policy
advice to preserve or restore financial stability. This assessment
and advice are mainly provided through the Financial Sector
Assessment Program (FSAP). IMF staff also provide technical
assistance in stress testing to many its member countries. An IMF
macroprudential stress test is a methodology to assess financial
vulnerabilities that can trigger systemic risk and the need of
systemwide mitigating measures. The definition of systemic risk as
used by the IMF is relevant to understanding the role of its stress
tests as tools for financial surveillance and the IMF's current
work program. IMF stress tests primarily apply to depository
intermediaries, and, systemically important bank
The evolution of risk management has resulted from the interplay of
financial crises, risk management practices, and regulatory
actions. In the 1970s, research lay the intellectual foundations
for the risk management practices that were systematically
implemented in the 1980s as bond trading revolutionized Wall
Street. Quants developed dynamic hedging, Value-at-Risk, and credit
risk models based on the insights of financial economics. In
parallel, the Basel I framework created a level playing field among
banks across countries. Following the 1987 stock market crash, the
near failure of Salomon Brothers, and the failure of Drexel Burnham
Lambert, in 1996 the Basel Committee on Banking Supervision
published the Market Risk Amendment to the Basel I Capital Accord;
the amendment went into effect in 1998. It led to a migration of
bank risk management practices toward market risk regulations. The
framework was further developed in the Basel II Accord, which,
however, from the very beginning, was labeled as being procyclical
due to the reliance of capital requirements on contemporaneous
volatility estimates. Indeed, the failure to measure and manage
risk adequately can be viewed as a key contributor to the 2008
global financial crisis. Subsequent innovations in risk management
practices have been dominated by regulatory innovations, including
capital and liquidity stress testing, macroprudential surcharges,
resolution regimes, and countercyclical capital requirements.
How should a country implement inflation-forecast targeting for
monetary policy? This book explores the basic principles and
practices. A central theme is that managing expectations is
essential for achieving the inflation target and for effectively
managing short-term policy trade-offs. The book outlines efficient
operational procedures, central bank communications, financial
stability issues, and the importance of incorporating financial
conditions in inflation-forcast targeting. It also reviews the
experiences of Canada, the Czech Republic, India and the United
States. The analysis argues for assertive policies and maximum
transparency, especially when long-term expectations tilt towards
high inflation or deflation.
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