Jean-‐Pierre  Landau  november  2012  

two  opposite  views  (both  correct  but  par-al)  

  global  volatility  is  driven  by  Fundamentals,  hence:    "put  your  house  into  order"    let  the  exchange  rate  adjust  

  global  volatility  mainly  results  from  QE  implemented  by  advanced  economies  

1.  the  changing  nature  of  global  volatility  

2.  policy  responses  and  the  future  of  the  international  financial  system  

changing  nature(1)  :  the  world  as  a  single  

financial  system  (  Obs

changing  nature  (2):  the  system  is  incomplete  and  asymetric  

  segmented  by  different  currencies  (with  perimeters  different  from  national  jurisdictions;  dollar  liquidity)  

  asymetries  in  financial  development  :  not  the  same  "elasticity"  to  global  financing  conditions  

  asymetries  in  ability  to  produce  safe  assets  :  direction  of  capital  flows  influenced  by  risk  aversion  

changing  nature  (3):  very  complex  dynamics  

  interactions  between  monetary  policies:    ZLB,  QE  and  multiple  equilibria    amplification  mechanisms  through  banking  flows  (risk  taking  channel-‐  Shin)  

  increasing  weight  of  "global  monetary  stance"  in  domestic  inflation  (commodities)  

  "push"  factors  dominate  capital  flows  for  EMEs  (  Summers  vs  Stiglitz  in  1999)  

complex  dynamics  of  global  capital  flows  

  divergences  in  monetary  policies  

  risk  appetite  

  structure  and  siutation  of  domestic  financial  systems  

  possible  feedback  loops  created  by  foreign  exchange  reserve  management  

policy  responses  (1)    starting  point  :  

  independant  Central  Banks  with  mandate  on  price  stability  :  domestic  objectives  will  always  come  first  

  free  choice  of  capital  account  regime  

  those  two  features  complement  each  other  and  leave  enough  space  to  find  the  proper  balance  between  national  responses  and  international  cooperation  

policy  responses  (2):  a  simplified  framework  

for  domesCc  policies  

  three  possible  strategies  1.  "anchoring"  2.  "prevention"  3.  "cushioning"  

  can  -‐  and  must  -‐  be  mixed.  Proper  choice  must  take  into  account  negative  side  effects  

  "cushioning"  dominates    facilitates  other  strategies    intrinsic  benefits  (the  accumulation  of  Forex  reserves)  

a  role  for  "prevenCon"  

 CFM  have  a  bad  reputation  because  associated  with  ER  manipulation  and  macro  economic  distorsions  

  but  should  be  used  fro  financial  stability  in  consistency  with  domestic  macro  prudential  approaches  (liquidity  regulation,  currency  mismatches..)  

policy  responses  (3)  internaConal  cooperaCon  ?  

 happening  fo  regulation  :  BCBS  and  FSB  truly  global  

  for  CFM  :  try  and  avoid  negative  spill  over  

 multilateral  insurance  against  liquidity  shocks  

conclusion  

  relocalisation  of  financial  markets  ?  (  banking  model)  

  increased  regional  integration  and  financial  deepening:  then  exchange  rate  regime  ?