Policy Space and the Financial Sector in Emerging Market and Developing Economies : Early Observations from the Pandemic

Global and domestic factors shape a country’s Fiscal and Monetary Policy Space (FMPS). In response to the COVID-19 crisis, many countries adopted unconventional measures to expand policy space, including monetary policies that helped to widen fiscal policy space and vice versa. This has been driven by the uniquely severe nature of the crisis, where unprecedented expansionary fiscal and monetary policies, especially in advanced economies, were deployed concurrently to shore up liquidity and provide economic stimulus. The policy response in advanced economies was a key enabler for subsequent Emerging Market and Developing Economy (EMDE) policies. Low-interest rates supported by expansive monetary policy reduce the cost of government borrowing and thus enlarge fiscal policy space (FPS). Asset purchase programs also contributed to a tightening of the monetary-fiscal link, as these purchases increased the demand for, and reduced the cost of, longer-dated government debt. Fiscal policy can also increase the efficacy of monetary policy, while also aiding monetary policy space (MPS). This is achieved by providing a backstop, which ultimately helps preserve the central bank’s credibility and independence. However, this tightened nexus may put fiscal and monetary policy on a collision course in a reflation scenario, triggering financial market volatility. The objective of this paper is to highlight for policy makers and development practitioners how differences in FMPS across countries impacted the COVID-19 crisis response, as well as the important enabling role that the financial sector played. Toward this objective, a simple conceptual framework is developed for the analysis of the determinants and interactions between FMPS and the financial sector. This framework is then used to develop heatmaps for the assessment of FMPS.

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Bibliographic Details
Main Authors: Feyen, Erik, Gurhy, Bryan, Utz, Robert
Format: Report biblioteca
Language:English
en_US
Published: World Bank, Washington, DC 2022
Subjects:FMPS, FISCAL POLICY, MONETARY POLICY, COVID-19,
Online Access:http://documents.worldbank.org/curated/en/099511001312324764/IDU060cea0a60b5da04c7b09f0a0cab6a7ce508e
http://hdl.handle.net/10986/39420
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