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Policies for more robust and sustainable growth
Pulling the global economy out of a protracted period of subdued economic performance will require, first and foremost, advanced economies to address old challenges, and also emerging market and developing economies to steer through their growth transitions with credible policies.
For advanced economies, the WEO reinforces many of the messages provided in earlier reports. The euro area needs to repair its financial systems and adopt a credible Banking Union supported by a common backstop. The United States should resolve its political stand-off relating to fiscal policy, and promptly raise the debt ceiling. In addition, the Federal Reserve should carefully manage the process of monetary policy normalisation, taking into consideration prospects for growth, inflation and financial conditions. Both Japan and the United States need to accomplish medium-term fiscal adjustment and reform of their social safety net programmes. And Japan and the euro area should adopt structural reforms to boost potential output.
The appropriate policy mix and the pace of adjustment will differ across emerging market economies. But many economies share common policy priorities. Policymakers should allow their exchange rates to respond to changes in the environment and act as shock absorbers, while avoiding disorderly market conditions. In economies where monetary policy frameworks are less credible, efforts may need to focus more on providing a strong nominal anchor. Financial regulation and prudential actions should be taken to guard against financial instability. Fiscal adjustment should continue to rebuild buffers, unless downside risks materialise and funding conditions allow fiscal easing.
A new round of structural reforms is a must for many emerging market economies, including investment in infrastructure, to reignite potential growth. China needs to rebalance growth away from investment toward consumption to make way for more balanced and sustainable domestic and global growth.