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Transcript
Fixing the exchange rate
1
Plan
1. Exchange rate and protectionism
2. International reserve currencies
2
Exchange rates & protectionism
• “Currency manipulator” ??
• Should the WTO be involved in regulating
the exchange rate?
3
Or are capital controls the solution?
Brazilian President Dilma Rousseff referred to unstable
capital flows as a “liquidity tsunami”
11 Apr 2012: http://www.aljazeera.com/indepth/opinion/2012/04/20124894553253392.html
4
Brazilian exports getting crushed by currency appreciation
5
Do trilemma solutions need to be compatible
across countries?
• Brazil is complaining now
• Used to have a fixed XR
• Then East Asian Financial Crisis hit
• Currency value collapses under speculation (Dec 1998/
Jan 1999)
• MERCOSUR?
• Argentina’s exports become uncompetitive over night
• Argentina’s currency collapses in 2002
6
Do the world’s 2 largest economies have
compatible solutions to the trilemma?
• US “shock absorber”:
– Floating exchange rate
• China opts for:
– restrictions on capital flows
– fixes its currency to the dollar
• How can the dollar adjust if China fixes to it?
• If this is the current monetary system…
• We’re all doomed
7
What can China do?
• Gradual appreciation?
– A one-way road to “hot money” and a scary bubble
• A one-off revaluation?
– Catastrophic economic dislocation
– Politically possible given the export-oriented sector
strength?
• Status quo?
– Unsustainable in the long-run
8
http://www.ft.com/intl/cms/s/0/7e010a5a-8324-11e1-9f9a-00144feab49a.html#axzz1rjqaPoVT
9
10
• Complaints from Mexico
• But even as their currency appreciated, it was far below where it
was before the crisis
11
http://www.bea.gov/newsreleases/international/transactions/transnewsrelease.htm
12
So, are global imbalances the fault of the
United States?
• How can the US get away with running
Current Account deficits year after year?
• Capital Account surpluses
• Why?
• Are we really a great place to invest?
• International Reserve Currency
– The world has coordinated on the dollar
13
The Euro
• The ultimate commitment
• So, if it’s credible, will it overtake the dollar
as the international reserve currency?
14
15
Good Will Hunting
• SKYLAR: Maybe we could go out for coffee sometime?
• WILL: Great, or maybe we could go somewhere and just
eat a bunch of caramels.
• SKYLAR: What?
• WILL: When you think about it, it's just as arbitrary as
drinking coffee.
• SKYLAR: (laughs) Okay, sounds good.
•
http://www.imsdb.com/scripts/Good-Will-Hunting.html
16
Is the euro an alternative?
• Coordination game
• The NY meeting game…
– The Dollar is “noon, Grand Central information booth”
• Present distribution of reserve currencies:
– Dollar: ~60%
– Euro: ~25%
– Pound: ~4%
– Yen: ~4%
– Swiss franc: ~0.1%
– Other: 5%
17
Obstacles
• A focal point: The more people who use an
international currency, the more effective it is
(increasing returns to scale)
• No equivalent to the US treasury bill @ the EU level
• Leadership – who do you trust?
– US track record v. EU (…Greece?)
18
Is the renminbi an alternative?
19
Dollar retreats on stimulus speculation
(4/9/2012)
• “The dollar continued its retreat against the yen yesterday …
• “after last week’s US employment data showing a slowdown
in the pace of job creation stoked speculation about further
stimulus measures to keep economic recovery on track.”
• Yen is a safe-haven
• And it’s killing Japanese exports
20
21
Japan
• How would you describe the Japanese Diet?
a) Low in poly-saturated fats
b) A parliament
22
Japan’s Diet rejects central bank pick
•
Japan’s parliament has rejected a
government nominee to the policy
board of the central bank, in a sign of
tensions over the pace and scale of
monetary easing needed to revive the
world’s third-biggest economy.
•
If the parliament selects the Prime
Minister / Government, why would
they reject the government?
•
Bicameral!
– House of Representatives
– House of Councillors
•
Both houses of parliament must
approve nominees. The 4 biggest
opposition groups have a combined
122 seats in the upper house (104
seats for the ruling Democratic Party
of Japan).
23
?
Prime Minister Noda must enjoy the
confidence of the House of
Representatives to remain in office
24
Japan’s Diet rejects central bank pick
•
The opposition-controlled House of Councillors on Thursday (4/5/2012) voted
127 to 111 against the appointment to the central bank’s highest decisionmaking body.
•
The cabinet’s nomination ... had been seen as a tacit endorsement of the
bank’s basic view on the limitations of monetary policy in banishing Japan’s
persistent state of deflation.
•
In February the BoJ surprised markets by expanding its asset-purchasing
programme - its key monetary policy tool, with interest rates near zero while adopting an inflation “goal” of 1 per cent.
•
AND: Last month “took various measures to ensure a smooth supply of funds
for the nation’s small to medium-sized enterprises”
•
BUT: “refrained from increasing asset purchases”
•
Opposition view: "the BoJ has not done enough to spur a rebound in an
economy that shrank in 3 of the past 4 years and continues to experience
falling prices.“
•
“This is democracy in action,” said Robert Feldman, senior economist at
Morgan Stanley MUFG Securities in Tokyo. “There’s a genuine policy debate
going on right now about the role of the central bank in fighting deflation.” 25
Other “safe havens”?
26
Why have the Swiss been more successful in bringing down the
franc than the Japanese have been in bringing down the yen?
27
Is the SDR an alternative?
28
Be careful what you wish for…
• Benefits of international reserve currency
– finance fiscal deficits
– enhance international prestige
– debt denoted in your own currency
• Costs of international reserve currency
– Monetary policy autonomy is hindered - vast
quantities of your currency held abroad
– Overvaluation leads to uncompetitive exportoriented/import-competing sectors
29
Take-homes on Euro
• Solves the old problem that the IMF failed to solve
• Still limited as a currency
– No EU level bond
• Will it become the new international reserve
currency?
– Not any time soon
– Coordination game
– The Dollar is still “noon, Grand Central information booth”
30
Thank you
WE ARE GLOBAL GEORGETOWN!
31