Thread by @paures12

#COVID is global. The problem doesn't end with China, US, and Europe. It has to be stoped EVERYWHERE, including poor and Emerging countries!

Poor countries have no resources.

Emerging markets lack resources, PLUS many are at a crossroads policywise for a couple reasons(1/11)

So there are two questions:

1. How do we cover the increase in the demand for liquidity in both poor and EM?

2. What is the best monetary policy response when on the one hand you need to provide liquidity but on the other you might be facing inflationary pressures? (2/11)

Wrt 1: IMF and WB usually act as lenders of last resource, but the current need for liquidity is massive. Capacity will be lacking. So what is the plan? We need one asap. Does anyone know? I haven't heard of any, but maybe I missed it there is so much info to sort through (3/11)

It seems to me that at the end of the day the FED and the ECB will have to provide that liquidity as well (its starting to sound like a sisyphean job for the FED and ECB?!)... maybe with the IMF and the WB as intermediaries? I can't think of an alternative right now. (4/11)

Wrt 2: All EM are facing the same need for liquidity as the rest of the world, but on top, many are facing either one or two roadblocks:

a. they are experiencing a sudden stop of capital flows

b. they are highly oil dependent. And Oil prices are way down.

(5/11)

We are seeing sudden stops that can correspond to output drops of around 5-7% of GDP.

Given the world's financial situation, I don't really see the pattern reverting. So add that loss in output to the drop that is coming from #COVID! (6/11)

EM that are oil reliant have an oil GDP share that is between 2 and 15% of total GDP, and the corresponding share in fiscal revenue is much larger.

If we can't restart the world economy soon, dramatic drops in the demand for oil will only push prices down further. (7/11)

Sudden stops and/or lower oil revenues translate into large currency depreciations.

Those depreciations have historically generated inflationary pressures, causing central banks to keep interest rates high and liquidity low amid an economic downturn (i.e. 2007/08) (8/11)

But this time the need for liquidity is outrageous.

If we think that the drop in demand is sharp enough to counterbalance the inflationary pressures from the currency depreciation, then this is not a problem policywise... (9/11)

But presumably, low oil prices and capital outflows will outlast the demand shock. Then central banks will be facing a time consistency issue.

They need to be able to provide the liquidity today, without compromising their mandate to keep inflation under control tomorrow (10/11)

If we think the situation is rough in the developed world, think twice. From an economic standpoint the situation is even more complicated in the south. And this time around it's not just THEIR PROBLEM, this is EVERYONE'S PROBLEM, because the virus will come back to us! (11/11)