1 Currency Wars: Global Money in 2010 Jeffrey Frankel Harpel Professor of Capital Formation &...

11

Currency Wars:Currency Wars:Global Money in 2010Global Money in 2010

Jeffrey FrankelJeffrey FrankelHarpel Professor of Capital Formation & Growth,Harpel Professor of Capital Formation & Growth,

Harvard University Harvard University

Macquarie Securities Macquarie Securities Boston, December 8, 2010Boston, December 8, 2010

22

Currency Wars Chronology, Fall 2010Currency Wars Chronology, Fall 2010

September 15September 15Japan buys $20 b, for ¥, Japan buys $20 b, for ¥,

• after a 6-year absence from FX markets;after a 6-year absence from FX markets;

• thereby joining Switzerland, the other floater to have thereby joining Switzerland, the other floater to have appreciated in 2008-09 GFC and to have fought it by appreciated in 2008-09 GFC and to have fought it by FX intervention.FX intervention.

33

September 27: September 27: warning from Brazil’s Finance warning from Brazil’s Finance

Minister Guido Mantega:Minister Guido Mantega:

““We’re in the midst of We’re in the midst of an international currency war, an international currency war, a general weakening of currency. This threatens a general weakening of currency. This threatens us because it takes away our competitiveness.”us because it takes away our competitiveness.”

I.e., countries everywhere are trying I.e., countries everywhere are trying to push down the value of their currencies, to push down the value of their currencies, to gain exports & employment,to gain exports & employment,• a goal that is not globally consistent.a goal that is not globally consistent.

Currency Wars chronology, Currency Wars chronology, continuedcontinued

44

Renewed flows to emerging markets in 2010Renewed flows to emerging markets in 2010have met with $ purchases in FX interventionhave met with $ purchases in FX intervention• Brazil, Korea, Thailand, India & others Brazil, Korea, Thailand, India & others

must manage inflows:must manage inflows: AppreciationAppreciation Buying $ to prevent appreciationBuying $ to prevent appreciation Capital controls?Capital controls?

Currency Wars chronology,Currency Wars chronology, continuedcontinued

55


October 15:October 15:

U.S Treasury postpones semi-annual report to U.S Treasury postpones semi-annual report to Congress on currency manipulationCongress on currency manipulation

• although there has clearly been little appreciation of the although there has clearly been little appreciation of the RMB since China announces more flexibility in June.RMB since China announces more flexibility in June.

• (All a repeat of 2005.)(All a repeat of 2005.)

66

NovemberNovember• After inflation rises to 4.4% in October, After inflation rises to 4.4% in October,

China raises China raises ii & reserve requirements & reserve requirements and adopts new price controls.and adopts new price controls.

• US core inflation falls to 0.6% for year,US core inflation falls to 0.6% for year,the lowest since 1957.the lowest since 1957.

• => fears of deflation trap.=> fears of deflation trap.


77

• Nov. 17 Nov. 17 As European sovereign debt crisis resurfaces As European sovereign debt crisis resurfaces in Ireland, € hits 7-week lowin Ireland, € hits 7-week low (1.3 $/€). (1.3 $/€).

• Nov.20-21 Nov.20-21 Fed announces QE2Fed announces QE2 (signaled since August):(signaled since August):

will purchase $600b.will purchase $600b. Short-term market reaction: $ depreciatesShort-term market reaction: $ depreciates Immediate attacks on Fed action -- Immediate attacks on Fed action --

• Palin & conservatives: “debauching the currency”Palin & conservatives: “debauching the currency”

• German & China: $ depreciation is a deliberate salvo in currency warsGerman & China: $ depreciation is a deliberate salvo in currency wars


88

The reactions of most The reactions of most emerging markets show they learned two emerging markets show they learned two lessons from the 1990s currency crises:lessons from the 1990s currency crises:

Advantages of holding forex reserves:Advantages of holding forex reserves:• Lower frequency & severity of crises.Lower frequency & severity of crises.

Advantages of floating:Advantages of floating:• Speculators don’t have a target to shoot at;Speculators don’t have a target to shoot at;

• Accommodate shocks;Accommodate shocks;

• Discourage unhedged $ liabilities.Discourage unhedged $ liabilities. Such currency mismatch leads to bad balance sheet effects when Such currency mismatch leads to bad balance sheet effects when

devaluation comes.devaluation comes.

How did these lessons fare in the global crisis of 2008-09?How did these lessons fare in the global crisis of 2008-09?

99

ReservesReserves

Even though many developing & emerging market Even though many developing & emerging market countries described themselves as floating,countries described themselves as floating,

most took advantage of the boom of 2003-2008 most took advantage of the boom of 2003-2008 to build up reserves to unheard of heights, to build up reserves to unheard of heights, • in the aftermath of the crises of 1994-2001.in the aftermath of the crises of 1994-2001.

in contrast to past capital booms (1975-81, 1990-97).in contrast to past capital booms (1975-81, 1990-97).

1010

When the 2008-09 global financial crisis hit,When the 2008-09 global financial crisis hit,• those countries that had taken advantage of those countries that had taken advantage of

the 2003-08 boom to build up reserves did better.the 2003-08 boom to build up reserves did better. Frankel & Saravelos Frankel & Saravelos (2010).(2010). Aizenman Aizenman (2009)(2009) and Obstfeld, Shambaugh & Taylor and Obstfeld, Shambaugh & Taylor (2009)(2009) Vs. Blanchard Vs. Blanchard (2009)(2009) and Rose & Spiegel and Rose & Spiegel (2009)(2009)

This had also been the most common finding This had also been the most common finding in the many studies of Early Warning Indicators in the many studies of Early Warning Indicators in past emerging market crises.in past emerging market crises.

1111

EWIs: EWIs: The variables that show up as the strongest The variables that show up as the strongest predictors of country crises in 83 studies are: predictors of country crises in 83 studies are: (i) reserves and (ii) currency overvaluation(i) reserves and (ii) currency overvaluation

0% 10% 20% 30% 40% 50% 60% 70%

Reserves

Real Exchange Rate

GDP

Credit

Current Account

Money Supply

Budget Balance

Exports or Imports

Inflation

Equity Returns

Real Interest Rate

Debt Profile

Terms of Trade

Political/Legal

Contagion

Capital Account

External Debt

% of studies where leading indicator was found to be statistically signficant(total studies = 83, covering 1950s-2009)

Source: Frankel & Saravelos (2010)

1212

Best and Worst Performing Countries Best and Worst Performing Countries -- F&S (2010), -- F&S (2010), Appendix 4Appendix 4

-25% -20% -15% -10% -5% 0% 5% 10%

China

India

Morocco

Egypt, Arab Rep.

Indonesia

Jordan

Sri Lanka

Argentina

Poland

Australia

Turkey

Finland

Mexico

Georgia

Russian Federation

Macao, China

Estonia

Ukraine

Latvia

Lithuania

GDP Change, Q2 2008 to Q2 2009

Top 10

Bottom 10

64 countries in sample

1313

Table Appendix 6

Coefficients of Bivariate Regressions of Crisis Indicators on Each Independent Variable* (t-stat in parentheses)bolded number indicates statistical signficance at 10% level or lower, darker color shading equivalent to higher statistical significance

Currency Market

Equity Market

Recourse to IMF

Industrial Production

GDPSignificant and

Consistent Sign?^

Independent Variable

Reserves (% GDP)0.082 (2.52)

0.850 (1.6)

-1.020 (-1.92)

0.155 (2.22)

0.008 (0.27)

Yes

Reserves (% external debt)-0.000 (-1.42)

0.000 (2.11)

-0.010 (-3.42)

0.000 (3.62)

0.000 (3.07)

Yes

Reserves (in months of imports)0.002 (1.58)

0.103 (4.71)

-0.089 (-3.31)

0.006 (1.48)

0.001 (0.75)

Yes

M2 to Reserves0.000 (0.14)

-0.026 (-3.81)

-0.067 (-1)

-0.001 (-2.46)

0.000 (1.44)

Yes

Short-term Debt (% of reserves)-0.000 (-2.6)

-0.007 (-4.45)

0.000 (1.18)

-0.000 (-1.7)

-0.000 (-2.93)

Yes

REER (5-yr % rise)-0.293 (-5.4)

-0.303 (-0.32)

0.889 (0.99)

-0.000 (-0.01)

-0.029 (-0.85)

REER (Dev. from 10-yr av)-0.292 (-2.93)

-0.920 (-0.81)

0.671 (0.58)

-0.000 (-0.01)

-0.041 (-0.91)

GDP growth (2007, %)0.003 (1.7)

0.078 (1.58)

0.039 (1.63)

0.010 (2.59)

-0.002 (-1.21)

Yes

GDP Growth (last 5 yrs)0.002 (1.08)

0.118 (2.14)

0.052 (1.68)

0.009 (2.14)

-0.003 (-1.21)


0.087 (1.06)

0.042 (1.2)

0.016 (2.63)

-0.004 (-0.76)

GDP per capita (2007, constant 2000$)-0.003 (-0.7)

-0.296 (-4.69)

-0.221 (-3.23)

-0.027 (-2.48)

-0.010 (-1.74)

Change in Credit (5-yr rise, % GDP)-0.029 (-0.83)

-1.979 (-5.42)

0.139 (0.37)

-0.092 (-1.67)

-0.065 (-2.34)

Yes


-0.904 (-3.9)

-0.011 (-0.08)

-0.046 (-1.58)

-0.019 (-1.13)

Yes

Credit Depth of Information Index (higher=more)-0.005 (-1.34)

-0.115 (-1.72)

0.009 (0.19)

0.006 (0.57)

-0.003 (-0.47)

Bank liquid reserves to bank assets ratio (%)0.000 (1.52)

0.022 (1.51)

-0.000 (-13.97)

0.002 (2.34)

0.001 (2.58)

Yes

Current Account (% GDP)0.001 (1.57)

0.032 (2.18)

-0.032 (-3.46)

0.000 (0.42)

0.000 (0.78)

Yes

Current Account, 5-yr Average (% GDP)0.001 (1.31)

0.030 (1.66)

-0.032 (-2.76)

0.000 (0.53)

0.000 (0.42)


0.034 (1.46)

-0.038 (-2.63)

0.000 (0.15)

0.001 (1.59)

Net National Savings (% GNI)0.000 (0.9)

0.048 (4.5)

-0.020 (-1.88)

0.003 (2.42)

0.002 (2.92)

Yes

Gross National Savings (% GDP)0.000 (0.76)

0.047 (3.9)

-0.028 (-2.51)

0.003 (1.99)

0.002 (2.52)

Yes

Change in M3 (5-yr rise, % GDP)0.000 (0.16)

-0.018 (-1.41)

-0.001 (-0.14)

-0.002 (-1.49)

-0.001 (-1.05)


-0.023 (-1.5)

0.007 (0.63)

-0.002 (-1.14)

-0.001 (-0.91)

Trade Balance (% GDP)0.000 (0.44)

0.013 (1.2)

-0.018 (-2.38)

-0.000 (-0.78)

0.000 (0.01)

Exports (% GDP)0.000 (0.2)

-0.004 (-1.42)

-0.004 (-1.08)

-0.000 (-1.21)

-0.000 (-1.42)

Imports (% GDP)-0.000 (-0.04)

-0.007 (-1.67)

0.003 (1.01)

-0.000 (-1.18)

-0.000 (-1.46)

Inflation (average, last 5 yrs)0.000 (0.36)

0.080 (3.33)

-0.000 (-2.91)

0.003 (1)

-0.000 (-0.23)

Yes

Inflation (average, last 10 yrs)-0.000 (-1.25)

0.038 (1.81)

-0.000 (-0.92)

0.000 (0.03)

0.000 (0.31)

Stock Market (5 yr % change)-0.004 (-1.05)

0.022 (0.99)

0.046 (1.04)

0.001 (0.37)

-0.000 (-0.14)

Stock Market (5 yr return/st. dev.)-0.012 (-0.59)

-0.166 (-0.74)

0.436 (1.47)

-0.005 (-0.22)

-0.004 (-0.2)

Real Interest Rate-0.000 (-0.46)

0.036 (3.18)

0.006 (0.36)

0.001 (0.87)

0.004 (2.07)

Yes

Deposit Interest Rate-0.005 (-2.08)

0.107 (2.84)

0.001 (0.18)

0.002 (0.99)

-0.000 (-0.49)

Short-term Debt (% of exports)-0.000 (-0.88)

-0.023 (-3.66)

0.000 (0.09)

-0.000 (-2.03)

-0.001 (-3.99)

Yes

Short-term Debt (% of external debt)-0.001 (-1.41)

-0.014 (-0.64)

0.001 (0.18)

-0.000 (-0.2)

-0.000 (-0.26)

Public Debt Service (% of exports)0.001 (3.3)

0.022 (0.85)

-0.004 (-0.44)

-0.001 (-0.76)

0.003 (1.41)

Public Debt Service (% GNI)0.001 (3.02)

-0.010 (-0.33)

-0.031 (-0.83)

-0.005 (-0.68)

0.008 (1.1)

Multilateral Debt Service (% Public Debt Service)0.000 (1.41)

-0.001 (-0.2)

0.004 (1)

0.000 (0.97)

0.000 (0.65)

Aid (% of GNI)0.000 (2.67)

-0.019 (-0.93)

0.001 (0.18)

0.002 (1.09)

-0.001 (-0.09)

Financing via Int. Cap. Markets (gross, % GDP)0.000 (0.79)

-0.026 (-1.1)

-0.003 (-0.45)

0.001 (0.39)

-0.008 (-2.61)

Legal Rights Index (higher=more rights)-0.009 (-2.71)

-0.125 (-2.58)

-0.040 (-0.91)

-0.006 (-1.45)

-0.005 (-1.8)

Yes

Business Extent of Disclosure Index (higher=more disclosure)

-0.005 (-1.61)

-0.009 (-0.18)

-0.023 (-0.62)

0.006 (1.38)

0.002 (1.15)

Portfolio Flows (% GDP)-0.499 (-2.92)

0.344 (0.11)

1.433 (0.55)

0.726 (1.38)

-0.474 (-0.57)

FDI net inflows (% GDP)-0.000 (-0.67)

-0.003 (-3.73)

0.000 (0.2)

-0.000 (-15.13)

-0.000 (-1.52)

Yes

FDI net outflows (% GDP)0.000 (0.24)

0.002 (5.59)

0.001 (0.61)

0.000 (13.09)

0.000 (1.31)

Yes

Net FDI (% GDP)-0.000 (-0.05)

0.004 (0.97)

0.004 (0.43)

0.001 (7.06)

-0.000 (-0.05)

External Debt Service (% GNI)0.000 (0.76)

-0.058 (-2.39)

-0.007 (-0.65)

-0.001 (-0.74)

-0.005 (-6.32)

Yes

Present Value of External Debt (% exports)0.000 (0.31)

-0.007 (-3.99)

-0.000 (-0.08)

-0.000 (-1.67)

-0.000 (-2.77)

Yes

Present Value of External Debt (% GNI)0.000 (0.11)

-0.014 (-3.7)

-0.000 (-0.61)

-0.000 (-1.29)

-0.000 (-4.77)

Yes

Peg (1 = peg)0.057 (3.41)

-0.577 (-2.47)

-0.363 (-1.48)

-0.053 (-2.17)

-0.021 (-1.55)

Financial Openness (0=open)0.023 (1.34)

0.899 (4.56)

0.230 (1.03)

0.085 (1.6)

0.020 (0.63)

M3 (% GDP)0.000 (4.76)

-0.001 (-0.57)

-0.020 (-4.06)

0.000 (0.81)

0.000 (1.52)

Yes

M2 (% GDP)0.000 (4.21)

-0.001 (-0.59)

-0.019 (-3.88)

0.000 (0.63)

0.000 (1.43)

Yes

Domestic Credit (% GDP)0.012 (0.84)

-0.626 (-4.24)

-0.881 (-4.2)

-0.016 (-0.86)

0.004 (0.45)

Domestic Credit Provided by Banks (% GDP)0.000 (1.09)

-0.005 (-3.59)

-0.009 (-4.44)

-0.000 (-1.14)

0.000 (0.51)

Domestic Credit to Priv. Sector (% GDP)0.000 (0.58)

-0.006 (-4.92)

-0.014 (-4.19)

-0.000 (-1.03)

-0.000 (-0.32)

Market Cap of Listed Companies (% GDP)0.000 (1.86)

0.000 (0.28)

-0.010 (-1.91)

0.000 (0.45)

0.000 (1.66)

Yes

Euro Area-0.009 (-1.06)

-0.901 (-4.9)

--0.055 (-2.29)

-0.006 (-0.68)

Yes

Low Income Country0.021 (1.16)

0.729 (2.45)

0.376 (1.54)

- -

Middle Income-0.025 (-1.58)

0.821 (3.7)

0.398 (1.85)

0.067 (3.19)

0.017 (1.17)

Upper Income0.013 (0.86)

-0.982 (-4.83)

-1.079 (-3.27)

-0.067 (-3.19)

-0.017 (-1.17)

OECD-0.042 (-2.29)

-0.709 (-3.69)

-0.478 (-1.27)

-0.051 (-2.39)

-0.005 (-0.47)

Yes

South Asia0.063 (3.63)

0.799 (2.71)

0.185 (0.4)

0.195 (17.65)

0.015 (0.37)

Yes

Europe & Central Asia-0.078 (-4.9)

-1.038 (-5.13)

0.306 (1.34)

-0.071 (-3.45)

-0.052 (-4.29)

Yes

Middle East & North Africa0.074 (4.18)

0.092 (0.31)

-0.673 (-1.39)

0.058 (2.03)

0.074 (5.63)

Yes

East Asia & Pacific0.017 (0.8)

0.494 (1.75)

-0.953 (-2.12)

0.056 (1.55)

0.038 (2.64)

Yes

Sub-Saharan Africa-0.049 (-2.12)

0.549 (2.79)

0.513 (2.17)

0.068 (5.93)

0.017 (2.47)

Latin America & Carribean0.024 (0.94)

-0.634 (-1.53)

-0.320 (-0.81)

-0.018 (-0.73)

-0.046 (-1.82)

North America0.016 (0.26)

-1.003 (-5.2)

--0.027 (-2.25)

0.006 (0.91)

Yes

*OLS with heteroscedaticity robust standard errors performed for four continuous variables; probit for IMF recourse variable^At least two statistically signficant coefficients, of which all must have consistent sign (consistent = same sign, with exception of coefficient on IMF recourse variable, which should have opposite sign)

CAPITAL

FLOWS

EXT DEBT

INCOME

REGI

ON

FINANCIAL MKT

DEVELOPMENT

RESERVES

REER

GDP

CURRENT

ACCOUNT

TRADE

INFL.

DEBT COMPOSITI

ON

INT

RATE

CREDIT

STOCK

MKT

MONEY

F & Saravelos (2010): Bivariate

1414

Exchange Market

Pressure

Currency % Changes

(H208-H109

Recourse to IMF

(SBA only)

Equity %Chng (Sep08-Mar09)

Equity % Chng

(H208-H109)

Significant and

Consistent Sign?^

Independent Variable

Reserves (% GDP)0.164 (3.63)

0.087 (2.98)

-1.069 (-1.66)

0.011 (0.12)

0.010 (0.14)

Yes

Reserves (% external debt)0.000 (1.06)

0.000 (1.1)

-0.006 (-2.29)

0.000 (1.81)

0.000 (2.65)

Yes

Reserves (in months of imports)0.004 (2.25)

0.003 (1.95)

-0.119 (-3.01)

0.006 (1.32)

0.009 (2.32)

Yes

M2 to Reserves0.000 (0.27)

0.000 (0.76)

-0.044 (-0.91)

0.000 (0.02)

-0.000 (-0.09)

Short-term Debt (% of reserves)-0.000 (-1.97)

-0.000 (-4.22)

0.000 (2.13)

-0.001 (-2.89)

-0.001 (-3.11)

Yes

REER (5-yr % rise)-0.440 (-5.55)

-0.210 (-3.19)

1.728 (2.15)

-0.182 (-1.24)

-0.185 (-1.61)

Yes

REER (Dev. from 10-yr av)-0.475 (-3.96)

-0.230 (-2.47)

2.654 (2.56)

-0.316 (-1.71)

-0.316 (-2.1)

Yes

GDP growth (2007, %)-0.000 (-0.2)

0.001 (0.94)

0.070 (2.58)

-0.001 (-0.1)

-0.007 (-0.71)

GDP Growth (last 5 yrs)-0.003 (-0.81)

0.000 (0.26)

0.084 (2.4)

-0.003 (-0.26)

-0.014 (-1.15)


0.001 (0.43)

0.064 (1.66)

-0.012 (-0.67)

-0.020 (-1.12)


-0.035 (-0.98)

0.552 (1.02)

-0.274 (-2.97)

-0.248 (-4.13)

Yes


-0.011 (-1.05)

0.210 (1.03)

-0.089 (-1.65)

-0.089 (-2.35)

Credit Depth of Information Index (higher=more)-0.008 (-1.06)

0.000 (0.05)

0.224 (2.4)

-0.006 (-0.37)

-0.018 (-1.33)

Bank liquid reserves to bank assets ratio (%)0.000 (3.84)

0.000 (0.5)

-0.000 (-11.44)

-0.002 (-0.54)

-0.002 (-0.79)

Yes

Current Account (% GDP)0.001 (1.48)

0.002 (2.7)

-0.023 (-2.09)

0.009 (3.84)

0.007 (3.95)

Yes


0.001 (1.82)

-0.025 (-1.72)

0.007 (2.4)

0.006 (2.74)

Yes


0.002 (1.39)

-0.035 (-2.11)

0.008 (2.21)

0.007 (2.44)

Yes

Net National Savings (% GNI)0.002 (1.6)

0.001 (2.33)

-0.013 (-1.22)

0.006 (2.92)

0.004 (2.28)

Yes

Gross National Savings (% GDP)0.003 (2.01)

0.001 (2.53)

-0.015 (-1.36)

0.008 (3.42)

0.006 (3.03)

Yes


-0.000 (-0.16)

-0.000 (-0.08)

-0.004 (-1.08)

-0.004 (-2.79)


-0.000 (-0.29)

0.006 (0.51)

-0.005 (-1.25)

-0.006 (-2.86)

Trade Balance (% GDP)0.001 (1.73)

0.001 (1.78)

-0.014 (-1.51)

0.006 (2.72)

0.003 (1.97)

Yes

Exports (% GDP)0.000 (0.93)

0.000 (1.97)

-0.002 (-0.53)

0.000 (0.02)

-0.000 (-0.83)

Imports (% GDP)-0.000 (-0.15)

0.000 (0.57)

0.002 (0.79)

-0.000 (-0.73)

-0.000 (-1.36)


-0.001 (-0.75)

0.094 (3.4)

0.000 (0.01)

0.002 (0.26)

Yes


-0.001 (-1.54)

0.017 (2.04)

-0.000 (-0.16)

0.000 (0.18)

Yes

Stock Market (5 yr % change)-0.006 (-0.86)

-0.006 (-1.34)

0.035 (0.74)

-0.016 (-3.72)

-0.018 (-5.59)

Yes

Stock Market (5 yr return/st.dev.)0.010 (0.31)

-0.024 (-1.02)

-0.394 (-1.17)

-0.097 (-1.92)

-0.042 (-0.93)

Real Interest Rate-0.001 (-0.79)

-0.000 (-0.42)

-0.022 (-1.05)

0.005 (1.81)

0.004 (1.85)

Yes

Deposit Interest Rate-0.014 (-4.43)

-0.003 (-1.72)

0.058 (1.78)

0.019 (3.33)

0.009 (1.39)

Short-term Debt (% of exports)-0.000 (-0.04)

-0.000 (-1.43)

0.000 (0.36)

-0.004 (-3.28)

-0.003 (-2.82)

Yes

Short-term Debt (% of external debt)-0.001 (-1.41)

-0.001 (-2.1)

0.009 (1.17)

-0.001 (-0.34)

-0.000 (-0.03)

Public Debt Service (% of exports)0.002 (3.04)

0.000 (1.18)

-0.036 (-1.14)

0.008 (1.22)

0.005 (0.98)

Public Debt Service (% GNI)0.001 (2.37)

0.000 (0.97)

-0.050 (-0.71)

0.003 (0.33)

0.002 (0.3)

Multilateral Debt Service (% Public Debt Service)0.001 (1.77)

0.000 (0.52)

0.001 (0.17)

-0.001 (-1.05)

0.000 (0.01)

Aid (% of GNI)0.002 (2.81)

0.000 (1.22)

-0.141 (-3.23)

-0.007 (-0.77)

-0.001 (-0.15)

Yes

Financing via Int. Cap. Markets (gross, % GDP)-0.000

(0)-0.000 (-0.48)

-0.011 (-0.57)

-0.012 (-2.14)

-0.005 (-1)

Legal Rights Index (higher=more rights)-0.009 (-1.49)

-0.006 (-1.46)

0.008 (0.15)

-0.017 (-1.52)

-0.015 (-1.78)

Business Extent of Disclosure Index (higher=more disclosure)

-0.002 (-0.39)

-0.001 (-0.32)

-0.024 (-0.52)

-0.001 (-0.13)

-0.000 (-0.1)

Portfolio Flows (% GDP)-0.616 (-2.88)

-0.435 (-3.33)

2.090 (0.74)

-0.979 (-0.77)

-0.889 (-0.77)

Yes

FDI net inflows (% GDP)-0.000 (-2.05)

-0.000 (-0.87)

-0.000 (-0.04)

-0.000 (-2.57)

-0.000 (-2.05)

Yes

FDI net outflows (% GDP)0.000 (1.8)

0.000 (0.81)

-0.000 (-0.45)

0.000 (3.38)

0.000 (2.84)

Yes

Net FDI (% GDP)0.001 (1.15)

0.000 (0.44)

-0.002 (-0.27)

-0.000 (-0.13)

-0.000 (-0.27)

External Debt Service (% GNI)0.000 (0.91)

0.000 (0.05)

-0.000 (-0.04)

-0.016 (-5.11)

-0.013 (-4.87)

Yes

Present Value of External Debt (% exports)0.000 (0.08)

-0.000 (-0.38)

-0.000 (-0.06)

-0.001 (-3.55)

-0.001 (-3.92)

Yes

Present Value of External Debt (% GNI)0.000 (0.16)

-0.000 (-0.82)

0.000 (0.38)

-0.003 (-4.39)

-0.002 (-3.8)

Yes

Peg (1 = peg)0.100 (3.89)

0.055 (3.34)

-0.577 (-1.89)

-0.075 (-1.67)

-0.041 (-1.04)

Yes

Financial Openness (0=open)0.083 (2.76)

0.023 (1.16)

-0.587 (-1.72)

0.059 (0.68)

0.003 (0.05)

Yes

M3 (% GDP)0.001 (4.12)

0.000 (4.47)

-0.020 (-3.45)

0.000 (0.31)

-0.000 (-0.22)

Yes

M2 (% GDP)0.001 (4.24)

0.000 (4.78)

-0.022 (-3.43)

0.000 (0.4)

-0.000 (-0.03)

Yes

Domestic Credit (% GDP)0.040 (1.53)

0.009 (0.61)

-0.593 (-2.66)

-0.010 (-0.22)

-0.027 (-0.62)

Domestic Credit Provided by Banks (% GDP)0.000 (1.81)

0.000 (1.52)

-0.006 (-3.17)

-0.000 (-0.21)

-0.000 (-0.55)

Yes

Domestic Credit to Priv. Sector (% GDP)0.000 (1.87)

0.000 (1.51)

-0.012 (-3.13)

-0.000 (-0.5)

-0.000 (-0.87)

Yes

Market Cap of Listed Companies (% GDP)0.000 (1.65)

0.000 (2.01)

-0.006 (-1.41)

0.000 (1.35)

0.000 (1.47)

South Asia0.045 (0.81)

0.045 (2.12)

0.476 (0.99)

0.158 (1.81)

0.033 (0.54)

Yes

Europe & Central Asia-0.150 (-4.43)

-0.095 (-5.61)

0.636 (2.09)

-0.202 (-4.43)

-0.167 (-4.64)

Yes

Middle East & North Africa0.080 (2.7)

0.061 (2.86)

-0.003 (0.05)

0.049 (0.84)

Yes

East Asia & Pacific0.071 (2.71)

0.034 (1.58)

-0.629 (-1.34)

0.135 (2.63)

0.054 (1.08)

Yes

Sub-Saharan Africa-0.006 (-0.14)

-0.024 (-0.83)

-0.424 (-0.98)

-0.068 (-0.89)

0.047 (0.72)

Latin America & Carribean-0.014 (-0.23)

-0.013 (-0.39)

0.205 (0.47)

-0.049 (-0.84)

-0.048 (-0.93)

North America0.061 (0.92)

0.041 (0.91)

-0.030 (1.1)

0.024 (0.95)

*OLS with heteroscedasticity robust standard errors performed for four continuous variables; probit for IMF recourse variable^At least two statistically signficant coefficients, of which all must have consistent sign (consistent = same sign, with exception of coefficient on IMF recourse variable, which should have opposite sign)

RESERVES

REER

GDP

CURRENT

ACCOUNT

CREDIT

MONEY

STOCK

MKT

TRADE

INFL.

DEBT COMPOSITI

ON

INT

RATE

CAPITAL

FLOWS

EXT DEBT

REGI

ON

FINANCIAL MKT

DEVELOPMENT

F & Saravelos (2010): Multivariate

Table Appendix 7

Coefficients of Regressions of Crisis Indicators on Each Independent Variable and GDP per Capita* (t-stat in parentheses)bolded number indicates statistical signficance at 10% level or lower

1515

FloatingFloating

Most medium-income Emerging Market Most medium-income Emerging Market countries reacted to the currency crises of the countries reacted to the currency crises of the 1990s by increasing exchange rate flexibility1990s by increasing exchange rate flexibility

• with the major exception of Eastern Europe.with the major exception of Eastern Europe.

The flexibility has helped.The flexibility has helped.

1616

Poland,Poland, the the only continental EU member with a floating only continental EU member with a floating exchange rate, was also the only one to escape exchange rate, was also the only one to escape negative growth in the global recession of 2009negative growth in the global recession of 2009

2006 2007 2008 2009 2010 Exchange Rate

Poland6.2 6.8 5.1 1.7 3.5f

Floating

Lithuania7.8 9.8 2.9 -14.7 -0.6f

Fixed

Latvia12.2 10.0 -4.2 -18.0 -3.5f

Fixed

Estonia10.6 6.9 -5.1 -13.9 0.9f

Fixed

Slovakia8.5 10.6 6.2 -4.7 2.7f

Euro

Czech Republic6.8 6.1 2.5 -4.1 1.6f

Flexible

Hungary3.6 0.8 0.8 -6.7 0.0f

Flexible

Source: Cezary Wójcik, 2010

(de facto)

% change in GDP

1717

Depreciation boosted netDepreciation boosted net exports; contribution exports; contribution to to GDPGDP growth growth >> 100% 100%

3,2

3,5

3,7

4,0

4,2

4,5

4,7

I III V VII IX XI I III V VII IX XI I III V VII IX

2008 2009 2010

8,0

13,0

18,0

23,0

28,0

Contribution of Net X to GDP:

2009: 2,5 3,4 3,2 3,4

GDP growth rate: 1,7

Source: Cezary Wójcik

kroon / $Estonia

Latvialats / $

zlotys / $

The Polish exchange rate increased by 35%. The Polish exchange rate increased by 35%.

1818

Capital flows to emerging markets, especially Asia, Capital flows to emerging markets, especially Asia, recovered quickly from the 2009 recession.recovered quickly from the 2009 recession.

These countries again show big balance of payments surplusesThese countries again show big balance of payments surpluses

Goldman Sachs

1919

Although China continues the most salient case, Although China continues the most salient case, Korea, Singapore & Taiwan are also Korea, Singapore & Taiwan are also

adding heavily to reserves.adding heavily to reserves.

GS Global ECS Research

2020

Others, such as India & Malaysia, are currently Others, such as India & Malaysia, are currently taking the inflows in the form of currency taking the inflows in the form of currency

appreciation, more than reserve accumulation.appreciation, more than reserve accumulation.


less-managed floating (“more appreciation-friendly”)

more-managed floating

2121

In Latin America as well, inflows have returned,In Latin America as well, inflows have returned,

less-managed floating (“more appreciation-friendly”)

more-managed floating


but as appreciation in Chile & Colombiabut as appreciation in Chile & Colombia. . reflected mostly as reserve accumulation in Peru,reflected mostly as reserve accumulation in Peru,

2222

Fear of non-cooperative “competitive devaluation” Fear of non-cooperative “competitive devaluation” is an argument for fixed exchange ratesis an argument for fixed exchange rates• rooted in the 1930s.rooted in the 1930s.• That is why the architects of the post-war monetary order That is why the architects of the post-war monetary order

chose fixed exchange rates chose fixed exchange rates at Bretton Woods, NH, in 1944.at Bretton Woods, NH, in 1944.

But it is now used to argue that China But it is now used to argue that China should move should move from fixingfrom fixing to to floatingfloating..• US Congressmen don’t US Congressmen don’t

care about regimes;care about regimes;

• they just want a stronger RMB vs. $.they just want a stronger RMB vs. $.

Is the currency war metaphor appropriate?Is the currency war metaphor appropriate?

2323

Economic historians have decided Economic historians have decided competitive devaluation under 1930s competitive devaluation under 1930s conditions was not a problem after all.conditions was not a problem after all.

True, countries couldn’t all devalue True, countries couldn’t all devalue against each other,against each other,

But they could and did all devalue against goldBut they could and did all devalue against gold• which worked to ease global monetary policy, which worked to ease global monetary policy,

just what was needed.just what was needed.

Is the currency war metaphor applicable?Is the currency war metaphor applicable? continuedcontinued

2424

The same is true today:The same is true today:• The Fed’s QE2 won’t just raise the money supply in the US;The Fed’s QE2 won’t just raise the money supply in the US;

• it will also loosen globally,it will also loosen globally, to the extent that foreign central banks react by buying $ to the extent that foreign central banks react by buying $

• to prevent their own currencies from appreciating.to prevent their own currencies from appreciating.

• which is what much of the world needs.which is what much of the world needs.

For those who don’t need it, because they are already For those who don’t need it, because they are already in danger of overheating, they can allow appreciation, in danger of overheating, they can allow appreciation, and so calibrate however much expansion they want.and so calibrate however much expansion they want.

Multilateral cooperation is not necessary for this.Multilateral cooperation is not necessary for this.


2525

Indeed, the currency war critics Indeed, the currency war critics seem to have forgotten the point seem to have forgotten the point

of a global floating system:of a global floating system: In some places In some places (US),(US),

unemployment is high & inflation low, unemployment is high & inflation low, • calling for easy monetary policy;calling for easy monetary policy;

In other places In other places (China, Brazil, India…),(China, Brazil, India…), economies are overheating,economies are overheating,• calling for tight monetary policy.calling for tight monetary policy.

The point of a floating system is to accommodate The point of a floating system is to accommodate such inevitable macro divergences smoothly.such inevitable macro divergences smoothly.

No international cooperation is needed.No international cooperation is needed.

2626

Would this put unfair pressure on ChinaWould this put unfair pressure on Chinato choose between inflation, to choose between inflation,

if it continues to keep the RMB down,if it continues to keep the RMB down, and appreciation?and appreciation?

No.No. Perhaps China can continue Perhaps China can continue

to sterilize inflows awhile longer, to sterilize inflows awhile longer, • e.g., raising bank reserve requirements.e.g., raising bank reserve requirements.• True, eventually it will have to give that up.True, eventually it will have to give that up.

But there is nothing unfair about making China But there is nothing unfair about making China choose between inflation and appreciation.choose between inflation and appreciation.

Monetary expansion by the US is perfectly legitimateMonetary expansion by the US is perfectly legitimate• especially at a time of deflation danger.especially at a time of deflation danger.• If it puts pressure on China, that is far more clearly If it puts pressure on China, that is far more clearly

within the “rules of the game” than threatening tariffs.within the “rules of the game” than threatening tariffs.

2727

Other kinds of international cooperation Other kinds of international cooperation areare needed; needed;• the 1930s currency war metaphors are not totally misplaced:the 1930s currency war metaphors are not totally misplaced:

Currency war could turn into trade warCurrency war could turn into trade war

• if Congress follows through on legislation to impose if Congress follows through on legislation to impose (WTO-illegal)(WTO-illegal) tariffs on China as punishment for non-appreciation.tariffs on China as punishment for non-appreciation.

• Until now, the US & G20 have held the line on protectionism Until now, the US & G20 have held the line on protectionism compared to the milder recessions of 1991 & 2001,compared to the milder recessions of 1991 & 2001, let alone the Smoot Hawley tariff of 1930.let alone the Smoot Hawley tariff of 1930.


2828

China would take some responsibilityChina would take some responsibility• to reallocate its economy away from to reallocate its economy away from

exclusive reliance on exports & manufacturingexclusive reliance on exports & manufacturing toward domestic consumption & services,toward domestic consumption & services,

• health, education, housing, environment, insurance & other services.health, education, housing, environment, insurance & other services.

• How? By allowing the RMB to appreciate,How? By allowing the RMB to appreciate,• but also by increasing domestic demand.but also by increasing domestic demand.

Meanwhile, the US would ideally also take responsibility.Meanwhile, the US would ideally also take responsibility.• Even while prolonging expansionary policy this year,Even while prolonging expansionary policy this year,

including fiscal expansion designed with high bang-for-the-buck,including fiscal expansion designed with high bang-for-the-buck,

• the US should take steps today to lock the US should take steps today to lock in a future return to fiscal responsibility,in a future return to fiscal responsibility,

e.g., by putting Social Security on a firm footing.e.g., by putting Social Security on a firm footing.

Ideally the US & China would reach agreement Ideally the US & China would reach agreement on how to address current account imbalances:on how to address current account imbalances:

2929

Will Unsustainable Current Account Deficits Will Unsustainable Current Account Deficits Lead to the End of Dollar Hegemony?Lead to the End of Dollar Hegemony?

Some argue the US current account Some argue the US current account deficit is sustainable indefinitely.deficit is sustainable indefinitely.• They believe that the US will continue to enjoy They believe that the US will continue to enjoy

its unique “exorbitant privilege,” its unique “exorbitant privilege,” able to borrow unlimited amounts in its own currencyable to borrow unlimited amounts in its own currency because it is the dominant international reserve asset.because it is the dominant international reserve asset.

3030

““Bretton Woods II”Bretton Woods II”

Dooley, Folkerts-Landau, & Garber Dooley, Folkerts-Landau, & Garber (2003) (2003) ::

• today’s system is a new Bretton Woods,today’s system is a new Bretton Woods, with Asia playing the role that Europe played with Asia playing the role that Europe played

in the 1960s—buying up $ to prevent in the 1960s—buying up $ to prevent their own currencies from appreciating.their own currencies from appreciating.

• More provocatively: More provocatively: China is piling up dollars China is piling up dollars not because of myopic mercantilism, not because of myopic mercantilism, but as part of an export-led development strategy but as part of an export-led development strategy that is rational given China’s need to import workable that is rational given China’s need to import workable systems of finance & corporate governance.systems of finance & corporate governance.

3131

My own view on Bretton Woods II:My own view on Bretton Woods II:

• The 1960s analogy is indeed apt, The 1960s analogy is indeed apt, • but we are closer to 1971 than to 1944 or 1958. but we are closer to 1971 than to 1944 or 1958.

• Why did the BW system collapse in 1971?Why did the BW system collapse in 1971?

The Triffin dilemma could have taken decades The Triffin dilemma could have taken decades to work itself out.to work itself out.

But the Johnson & Nixon But the Johnson & Nixon administrations accelerated administrations accelerated the processthe process by fiscal & monetary expansion by fiscal & monetary expansion (driven by the Vietnam War & Arthur Burns, respectively).(driven by the Vietnam War & Arthur Burns, respectively).

These policies produced: declining external balances, These policies produced: declining external balances, $ devaluation, & the end of Bretton Woods$ devaluation, & the end of Bretton Woods. .

3232

There is no reason to expect better today:There is no reason to expect better today:

1)1) Capital mobilityCapital mobilityis much higher now than in the 1960s.is much higher now than in the 1960s.

2)2) The US can no longer rely The US can no longer rely on support of foreign central banks:on support of foreign central banks:

neither on economic groundsneither on economic grounds

(they are not now, as they were then, (they are not now, as they were then, organized into a cooperative framework where organized into a cooperative framework where each agrees explicitly to hold $ if the others do), each agrees explicitly to hold $ if the others do),

nor on political groundsnor on political grounds

(these creditors are not the staunch allies (these creditors are not the staunch allies the US had in the 1960s). the US had in the 1960s).

3333

The financial crisis caused a flight to quality The financial crisis caused a flight to quality which evidently still means a flight to US $.which evidently still means a flight to US $.

US Treasury bills in 2008-09 were more in demand US Treasury bills in 2008-09 were more in demand than ever, as reflected in very low interest rates.than ever, as reflected in very low interest rates.

The $ The $ appreciatedappreciated, rather than depreciating , rather than depreciating as the “hard landing” scenario had predicted.as the “hard landing” scenario had predicted.

=> The day of reckoning had not yet arrived.=> The day of reckoning had not yet arrived.

Chinese warnings Chinese warnings (2009)(2009) may be turning point: may be turning point:• Premier Wen worried US T bills will lose value.Premier Wen worried US T bills will lose value.

• PBoC Gov. Zhou proposed PBoC Gov. Zhou proposed replacing $ as international replacing $ as international currency.currency.

3434

Multiple International Multiple International Reserve SystemReserve System

The € now exists as a rival to the $.The € now exists as a rival to the $.

The ¥ & SF are also safe havens.The ¥ & SF are also safe havens.

The SDR came back The SDR came back from the dead in 2009.from the dead in 2009.

Gold made a comeback as Gold made a comeback as an international reserve too.an international reserve too.

Someday the RMB will join the roster.Someday the RMB will join the roster.

= a multiple international reserve currency system.= a multiple international reserve currency system.

3535

The euro project is lookingThe euro project is lookingfar less successful than just a few years agofar less successful than just a few years ago

Many predictions of euro skeptics have come true:Many predictions of euro skeptics have come true:• Periphery countries and core countries have had trouble Periphery countries and core countries have had trouble

reconciling asymmetric monetary needs.reconciling asymmetric monetary needs.• Euro members have not had enough labor mobility Euro members have not had enough labor mobility

or flexibility to make up for it.or flexibility to make up for it.

• Efforts to prevent excessive debt & bailouts have failed:Efforts to prevent excessive debt & bailouts have failed: The Stability & Growth Pact failed The Stability & Growth Pact failed with members big & small.with members big & small. The “No bailout clause” has failed with Greece.The “No bailout clause” has failed with Greece.

3636

Frankfurt & Brussels Frankfurt & Brussels made 3 mistakes regarding Greecemade 3 mistakes regarding Greece

2002-09: Did not allow spreads to open up 2002-09: Did not allow spreads to open up between sovereign debt of Greece & Germany.between sovereign debt of Greece & Germany.

Winter 2010: Did not tell Greece to go to the IMF. Winter 2010: Did not tell Greece to go to the IMF. Preferred instead to “handle it internally.” Preferred instead to “handle it internally.”

Still today: No “Plan B” to restructure Greek debt Still today: No “Plan B” to restructure Greek debt (and save the bailout fund for more deserving banks & PIIGs).(and save the bailout fund for more deserving banks & PIIGs).

3737

Judging from spreads, 2001-07, Judging from spreads, 2001-07, investors put zero odds on a default by Greece investors put zero odds on a default by Greece

or other Mediterranean countriesor other Mediterranean countries

Council on Foreign Relations

3838

Suddenly, in 2010, the Greek sovereign spread Suddenly, in 2010, the Greek sovereign spread shot up, exceeding 800% by June. shot up, exceeding 800% by June.

Even when the Greek crisis erupted, Even when the Greek crisis erupted, leaders in Brussels & Frankfurt leaders in Brussels & Frankfurt seemed to view it as a black swan, seemed to view it as a black swan, • instead of recognizing it as a close cousin instead of recognizing it as a close cousin

of the Argentine crisis of ten years earlier, of the Argentine crisis of ten years earlier, and many others in history,and many others in history,

• including among European countries.including among European countries.

3939

Sovereign spreads for 5 euro countries shot up in the 1st half of 2010

Creditworthiness: Some advanced economics Creditworthiness: Some advanced economics have fallen, as emerging markets have risen.have fallen, as emerging markets have risen.

4040

Sovereign debt worriesSovereign debt worries ......

• As predicted, the sovereign debt crisis in Europe is not going away.

• The big emerging market countries are in much better shape,

• in an amazing & historic role reversal.

4141

A remarkable role-reversal:

• Debt/GDP of the top 20 rich countries (≈ 80%) is already twice that of the top 20 emerging markets;

• and rising rapidly.

• By 2014 (at ≈ 120%), it could be triple.

4242

Ratings for “Emerging Economies”Ratings for “Advanced Economies”

4444

When does the “privilege” become “exorbitant?”When does the “privilege” become “exorbitant?” if it accrues solely because of size and history, without if it accrues solely because of size and history, without

the US having done anything to earn the US having done anything to earn the benefit by virtuous policies such as budget the benefit by virtuous policies such as budget discipline, price stability & a stable exchange rate. discipline, price stability & a stable exchange rate.

Since 1973, the US has racked up $10 trillion Since 1973, the US has racked up $10 trillion in debt and the $ has experienced a 30% loss in debt and the $ has experienced a 30% loss in value compared to other major currencies.in value compared to other major currencies.

It seems unlikely that macroeconomic policy discipline It seems unlikely that macroeconomic policy discipline is what has earned the US its privilege !is what has earned the US its privilege !

Appendix: Will the $ lose hegemony?

4545

Some argue that the privilege to incur $ Some argue that the privilege to incur $ liabilities has been earned in a different way:liabilities has been earned in a different way:

Global savings glutGlobal savings glut (Bernanke)(Bernanke)

The US appropriately exploits its comparative advantage The US appropriately exploits its comparative advantage in supplying high-quality assets to the rest of the worldin supplying high-quality assets to the rest of the world ..

• ““Intermediation rents…pay for the trade deficits.” Intermediation rents…pay for the trade deficits.” -- Caballero, Farhi & Gourinchas-- Caballero, Farhi & Gourinchas (2008)(2008)

• In one version, the US has been operating as the World’s In one version, the US has been operating as the World’s Venture Capitalist, accepting short-term liquid deposits and Venture Capitalist, accepting short-term liquid deposits and making long-term or risky investmentsmaking long-term or risky investments -- Gourinchas & Rey-- Gourinchas & Rey (2008)(2008)..

• US supplies high-quality assets:US supplies high-quality assets:Cooper Cooper (2005);(2005); Forbes Forbes (2008);(2008); Ju & Wei (2008);Ju & Wei (2008); Hausmann & Sturzenegger Hausmann & Sturzenegger (2006a, b);(2006a, b); Mendoza, Quadrini Mendoza, Quadrini & & Rios-RullRios-Rull (2007a, b)…(2007a, b)…

4646

The argument that the US offers assets of superior The argument that the US offers assets of superior quality, and so has earned the right to finance its quality, and so has earned the right to finance its deficits, was undermined by the dysfunctionality deficits, was undermined by the dysfunctionality revealed in the financial crisis of 2007-08. revealed in the financial crisis of 2007-08.

American financial institutions suffered a severe American financial institutions suffered a severe loss of credibility loss of credibility (corporate governance, accounting (corporate governance, accounting standards, rating agencies, derivatives, etc.), standards, rating agencies, derivatives, etc.),

How could sub-prime mortgages be How could sub-prime mortgages be the superior type of assets that uniquely the superior type of assets that uniquely merit the respect of the world’s investors?merit the respect of the world’s investors?

4747

But the events of 2008-09 also But the events of 2008-09 also undermined the opposing interpretation, undermined the opposing interpretation, the unsustainability position: the unsustainability position:

Why no hard landing for the $, as long feared? Why no hard landing for the $, as long feared? The $ appreciated after Lehman Brothers’ The $ appreciated after Lehman Brothers’

bankruptcy, & US T bill interest rates fell. bankruptcy, & US T bill interest rates fell.

Clearly in 2008 the world still viewed Clearly in 2008 the world still viewed • the US Treasury market as a safe haven and the US Treasury market as a safe haven and

• the US $ as the premier international currencythe US $ as the premier international currency..

4848

Is the $’s unique role Is the $’s unique role an eternal god-given constant? an eternal god-given constant?

Or will a sufficiently long record of deficits & Or will a sufficiently long record of deficits & depreciation induce investors to turn elsewheredepreciation induce investors to turn elsewhere??

Though arguments about the unique high quality of US private assets have been tarnished, the idea of America as World Banker is still alive: the $ is the world’s reserve currency, by virtue of US size & history.

4949

Historical precedent: £Historical precedent: £ ’s loss of premier ’s loss of premier international currency status in 20international currency status in 20thth century century

By 1919, US had passed UKBy 1919, US had passed UK in in

1.1. output (1872)output (1872)

2.2. trade (1914)trade (1914)

3.3. net international creditor position (1914-19)net international creditor position (1914-19)

Subsequently, Subsequently, $ passed £ as #1 reserve currency $ passed £ as #1 reserve currency (1940-45).(1940-45).

5050

From the literatureFrom the literatureon reserve currencieson reserve currencies

Determinant: Determinant:

1.1. SizeSize

2.2. Depth of Fin.mkt.Depth of Fin.mkt.

3. Rate of return3. Rate of return

Proxy:Proxy:

GDPGDP

FX turnoverFX turnover

inflation,inflation,LR depreciation,LR depreciation,Exch. rate varianceExch. rate variance

5151

From the literature, From the literature, continuedcontinued

Network externalities Network externalities

=> Tipping => Tipping captured by:captured by:

1)1) InertiaInertia lagslags

2)2) NonlinearityNonlinearity logistic functional formlogistic functional form

in determinantsin determinants oror

dummy for leader GDPdummy for leader GDP

5252

0.0

0.2

0.4

0.6

0.8

1.0

75 80 85 90 95 00 05 10 15 20 25 30 35 40

USD

DEM

EUR

Chinn & Frankel Chinn & Frankel (2005)(2005)

Projection of $ vs € Projection of $ vs € as shares of central banks’ foreign exchange reserves: as shares of central banks’ foreign exchange reserves:

a function of country size, financial market depth, & rate of return, a function of country size, financial market depth, & rate of return, with parameters estimated on 1973-98 datawith parameters estimated on 1973-98 data..Simulation assumes $ depreciation continues at 2001-04 rate.Simulation assumes $ depreciation continues at 2001-04 rate.

birthof €€

This scenario showed € This scenario showed € overtaking $ as top international overtaking $ as top international

reserve currency in 2022.reserve currency in 2022.

5353

International Currency RolesInternational Currency RolesTable B

Adapted from Kenen Function of money:

Governments Private actors

Store of value

International reserve holdings

Currency substitution (private dollarization)

Medium of exchange

Vehicle currency for foreign exchange intervention

Invoicing trade and financial transactions

Unit of account

Anchor for pegging local currency

Denominating trade and financial transactions

5454

A multiple reserve currency system is inefficient, A multiple reserve currency system is inefficient, in the same sense that barter is inefficient: in the same sense that barter is inefficient: money was invented in the first place to cut down money was invented in the first place to cut down on the transactions costs of exchange. on the transactions costs of exchange.

Nevertheless, if sound macro policies Nevertheless, if sound macro policies in the leader country cannot be presumed, in the leader country cannot be presumed, the existence of competitor currencies gives the existence of competitor currencies gives the rest of the world protection against the leader the rest of the world protection against the leader exploiting its position by running up too much exploiting its position by running up too much debt and then inflating/depreciating it away.debt and then inflating/depreciating it away.

5555

GoldGold

Gold was seen as an anachronism Gold was seen as an anachronism just a few years ago:just a few years ago:• the world’s central banks were selling off their stocks.the world’s central banks were selling off their stocks.

Gold re-joined the world monetary system in 2009:Gold re-joined the world monetary system in 2009:• The PBoC, RBI, & other Asian central banks The PBoC, RBI, & other Asian central banks

bought gold, to diversify their reserves.bought gold, to diversify their reserves.• Even in advanced countries, central banks Even in advanced countries, central banks

appear to have stopped selling.appear to have stopped selling.

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Special Drawing RightsSpecial Drawing Rights

The SDR has made a surprising comeback as a potential The SDR has made a surprising comeback as a potential international money, from near-oblivion. international money, from near-oblivion.

The G20 in 2009 decided to create new SDRs ($250b). The G20 in 2009 decided to create new SDRs ($250b). Shortly later, PBoC Gov. Zhou proposed replacing Shortly later, PBoC Gov. Zhou proposed replacing

the $ as lead international currency with the SDR. the $ as lead international currency with the SDR. The IMF is now borrowing in SDRs. The IMF is now borrowing in SDRs. The proposal has been revived for an international The proposal has been revived for an international

substitution account at the IMF, to extinguish an unwanted substitution account at the IMF, to extinguish an unwanted $ overhang in exchange for SDRs. $ overhang in exchange for SDRs.

The SDR has little chance of standing up as a competitor The SDR has little chance of standing up as a competitor to the € or ¥, let alone to the $. to the € or ¥, let alone to the $.

Still, it is back in the world monetary system.Still, it is back in the world monetary system.

5757http://ksghome.harvard.edu/~jfrankel/index.htm

1 Currency Wars: Global Money in 2010 Jeffrey Frankel Harpel Professor of Capital Formation &...

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Transcript of 1 Currency Wars: Global Money in 2010 Jeffrey Frankel Harpel Professor of Capital Formation &...