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Economics Commentary offers analyses and opinions on international monetary affairs and emerging markets capital markets developments. The content is primarily concerned with changes in the international monetary system and its impact on economic policies and international capital markets and draws extensively on participations in key international economic policy fora. Economics Commentary aims to support the public debate and markets' understanding of major international monetary and emerging capital markets developments.


Cryptocurrencies and tulipmania

28 December 2017

The spectacular price rises of many cryptocurrencies during the past 12 months have for some time been compared to the seventeenth century Dutch tulip mania. The comparison seems appropriate. Not because price rises are comparable. They are not as cryptocurrencies have seen price increases far greater than those seen for tulip bulbs. Tulips and cryptocurrencies share the same fundamental feature: They can be reproduced at will. As with tulip bulbs, with totally elastic supply, the substantial price increases for cryptocurrencies appear impossible to justify.[...]

International reserve diversification

6 December 2017

The composition of central banks’ international reserves has not changed much over the decades. Or has it? The latest IMF Coordinated Portfolio Investment Survey (CPIS) shows a significant increase in the number of countries in which assets are invested that are held as foreign exchange reserves. This seems indicative of some momentum towards greater diversification in international reserve holdings.[...]

International portfolio investments (update)

6 December 2017

International portfolio investments picked up in 2016 amid a push towards the United States and a modest recovery towards emerging markets. The latest IMF Coordinated Portfolio Investment Survey (CPIS) shows the total stock of cross-border portfolio investments in equity and debt securities, excluding securities held as international reserves, in December 2016 at 42.9 trillion (57 percent of world GDP) up from US$39.9 trillion in 2015 (54 percent of world GDP). The shifts in cross-border portfolio holding reveal a further decline of Euro Area securities and somewhat more concentrated portfolio holdings. Overall, total international portfolio investments have still not recovered from their 2007 peak relative to world GDP. [...]

Federal Reserve—Unwinding of securities holdings

1 December 2017

The Federal Reserve initiated in October2017 the unwinding of its securities holdings acquired as a result of its quantitative easing policy. It means channelling large amounts of credit and duration risk back into the market. At the same time, the collapse of money velocity highlights persistent strong liquidity preference by the market and likely wariness to absorb interest rate risk in an environment of targeted interest rate increases. The combination of low money velocity and long duration of the Fed's balance sheet means that unwinding of quantitative easing will be a complicated affair. At the end of targeted normalisation, the Fed will still retain unprecedented large amounts of rate and credit risks. The Fed could therefore become itself an important source of instability for monetary policy, the international monetary system and the dollar. [...]

Central banks and digital currencies

3 November 2017

Bitcoin closed at a record above US$7,000 on 2 November, up from US$702 12 months ago, serving as a stern reminder that digital currencies are on the rise. The advances of private cryptocurrencies have made central banks increasingly contemplate adopting official cryptocurrencies themselves in part also not to lose out against the digital currency rivals. While lately the Bundesbank argued that digital currencies are a long way off and the Bank of Estonia had to retreat from earlier hints it may support a digital currency, the Riksbank interim report on its e-krona project seems to conclude that adoption is possible in the near future and the People’s Bank of China announced that it completed key tests of its own digital currency. Yet, although the advantages of digital currencies in national transactions remain somewhat controversial hindering and possibly blocking prompt adoption, the benefits are clear in international payments. The adoption of any digital currency therefore will likely be driven in large part by perceived opportunities to make it big as a global digital currency on the nexus between technology and payments. [...]

IMF Annual Meetings——Exchange rates matter at last

17 October 2017

The IMF Annual Meetings on 14-15 October in Washington, D.C. offered plenty of optimism with the usual dose of caution. The world economy experiences the broadest upswing since the 2000s. Downside risks remain important including political risks, market frothiness, rising debt levels. Yet, one of the more intriguing aspects was the communiqué of the International Monetary and Financial Committee (IMFC), that was remarkable in its emphasis on exchange rates. Since 2000, the IMFC has only very rarely if ever mentioned exchange rates. This time, exchange rates and the international monetary system featured prominently. It is likely a sign that IMF member countries want a more assertive approach on international economic policy matters. [...]

Special Drawing Right (SDR)

Collection of comments on the SDR