Expert voices Vol 23, No. 05 - May 2019

Beyond taxes – how monetary and exchange rate policies can support sustainable development

A roadmap for the Sustainable Development Goals (SDGs) often emphasizes the fiscal side of macroeconomic policy. The role of monetary and exchange rate policies, which are just as crucial for maintaining financial stability and external balance, are often overlooked. How can countries use them to boost sustainable economic growth and development? We ask UN DESA’s Senior Economic Affairs Officer, Ingo Pitterle.

Can you explain how macroeconomic policies, and monetary policy in particular , can support progress towards the Sustainable Development Goals?

“Successful development stories from all around the world show us that a sound macroeconomic policy framework is critical to deliver stable and healthy economic growth, which in turn promotes long-term sustainable development. A robust macroeconomic environment reduces uncertainty, stimulating consumption and investment.

But the role of macroeconomic policy can go beyond that. We have, for example, recently seen new initiatives for monetary policy to support the transition towards a low-carbon economy. A group of central banks and supervisors have established the Network for Greening the Financial System to enhance the financial system’s role in managing climate risks and mobilizing capital for green and low-carbon investments. Proposals have also been put forward to introduce a low-carbon bias in the asset composition of official reserves and collateral.”

How do developed and developing countries differ when it comes to the impact of monetary policy on the real economy?

“Traditional monetary policy actions, such as a rise or a cut in interest rates, affect economic activity through various ways, including through changes in borrowing and lending, the exchange rate and asset prices. In countries with well-developed financial sectors, interest rate changes often have a direct and significant effect on investment decisions, the housing sector and consumer spending on durable goods. Conversely, in countries with less developed financial markets, the transmission of monetary policy is generally less effective. Corporate investment in the formal sector may respond, but the informal sector and household sector are less sensitive to interest rates, partly because people spend most of their money on essential goods, particularly on food items.”

What changes have we seen in recent months in global monetary policy?

“Since mid-2018, there has been a broad-based slowdown in global growth while, at the same time, inflationary pressures have remained mostly subdued. This has triggered a shift towards easier monetary policy stances across many developed and developing economies, including the United States, Europe and China. These moves have helped stabilize global financial conditions, supporting a recovery in capital flows to emerging economies. While we believe that short-term financial pressures have declined, there is a risk that easier monetary conditions may further fuel debt accumulation and increase medium-term risks to financial stability.”

For more information: World Economic Situation And Prospects: Monthly Briefing May 2019

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