However, the WEO also offers in-depth analyses of special critical policy issues in its analytical chapters, which in the latest edition are titled “Lessons for Monetary Policy from Asset Price Fluctuations” and “What's the Damage? Medium-Term Output Dynamics after Financial Crises.” These last two chapters focus on two topical issues arising from the global financial and economic crises. The first issue dealt with in the third chapter relates to the questions of whether loose monetary policy played a significant role in creating asset bubbles, such as the housing bubble that triggered the current global financial crisis, and whether monetary policy can and should be aimed at avoiding or pricking such asset bubbles before they end in crises. This chapter's basic conclusion is that although loose monetary policy was not “the smoking gun behind the current crisis,” monetary policy-makers could have and in the future should pay more attention to leading indicators such as rapid expansion of bank credit, a rising share of residential investment in GDP, widening current account deficits and skyrocketing asset prices in addition to inflation and output growth rates. The major lesson for policymakers and financial regulators, which was also stressed in the G-20's last summit communiqué and the reports of the Financial Stability Board (see my last column), is to aim for macrofinancial stability by focusing on macroprudential or systemic risk through countercyclical dynamic capital requirements tied to varying leverage ratios.
The WEO's last chapter's dismal conclusion is that the global recession, exacerbated by the financial crisis, will saddle the world economy with not only short-term losses, mitigated by timely expansionist fiscal and monetary policies, but also with medium-term enduring potential output losses arising from cuts in the employment rate, the capital-labor ratio and total factor productivity.
The 238-page GFSR, which is interlinked with the WEO in its assumptions and analysis, especially in drawing out the financial implications of the global economic imbalances analyzed in the WEO, has the current theme “Navigating the Financial Challenges Ahead.” Its three chapters are titled “The Road to Recovery,” “Restarting Securitization Markets: Policy Proposals and Pitfalls” and “Market Interventions during the Financial Crisis: How Effective and How to Disengage?” The first chapter's good news is that financial stability has improved, with a downwardly revised estimate of global impaired asset write-downs; the bad news is that serious risks remain and there are substantial potential costs to pay for the government bailouts of the troubled financial institutions in major advanced countries that have thwarted the meltdown of the global financial system. Let me emphasize one potential cost. The major advanced countries' rising fiscal deficits and heavy public debt burdens are likely to push up global long-term interest rates, making it more costly to borrow for everyone, including emerging economies like Turkey with chronic current account deficits. The GFSR's second chapter deals with the necessity of repairing credit intermediation by restarting the private securitization market -- in which debt bundles are created and traded -- backed by financial regulatory reforms to avoid the pitfalls of that market which contributed to the global crisis. The third chapter offers a preliminary evaluation of the government emergency interventions in major advanced countries in rescuing troubled financial institutions and examines the pace of exit strategies from those interventions, tying those strategies to effective financial regulatory reforms to control systemic risk.
So, let's give the IMF the credit it deserves as an international financial institution whose crucial global role has been confirmed and enhanced during the current crisis, whether or not it is asked to and agrees to play a direct role in Turkey again through another stand-by arrangement.
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