Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Controlled Capital Account Liberalization Eswar Prasad & Raghuram Rajan IMF Plan of Talk Reserve accumulation—how much, why, and cost-benefit issues Approaches to sterilization Other approaches to dealing with inflows The Prasad-Rajan proposal The proposal in the broader context of new literature on financial globalization China and India as illustrations China Foreign Exchange Reserves: Flows and Stocks 40 1000 900 35 800 30 25 600 Monthly changes Stock of reserves (RH) 20 500 400 15 300 10 200 5 100 0 Jan-95 0 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 (in billions of USD) (in billions of USD) 700 India Foreign Exchange Reserves: Flows and Stocks 8 160 Monthly changes 6 140 Stock of reserves (RH) 120 100 2 80 0 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 60 -2 40 -4 -6 20 0 (in billions of USD) (in billions of USD) 4 Why the Build-up of Reserves? Capital flows to emerging markets Speculative inflows Current account surpluses Oil revenues China: Reserve Accumulation and its Components 250 Reserve accumulation 200 Current account balance Net FDI 150 USD billion Net non-FDI capital inflows plus errors and omissions 100 50 0 -50 -100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 India: Reserve Accumulation and its Components 40 160 140 30 120 20 10 Private capital flows (Left axis) 80 60 0 -10 -20 2000Q1 40 Reserves (Right axis) 2000Q4 2001Q3 Current account balance (Left axis) 2002Q2 2003Q1 2003Q4 2004Q3 20 0 2005Q2 USD billion USD billion 100 Benefits of Reserve Accumulation Reduced vulnerability to crises Mitigates real exchange rate appreciation Lowers external borrowing costs Costs of Reserve Accumulation Complications for macroeconomic management Adjustment may come through inflation Opportunity cost of holding reserves Quasi-fiscal costs of sterilization Domestic policy distortions Sterilization: Instruments/Methods Repos, open market operations Central Bank securities Fx swaps Government deposits at the Central Bank Reserve requirements China: Stocks of Reserves and Central Bank Bills (in billions of RMB) 7000 6000 Foreign Exchange Reserves Stock of Outstanding PBC Bills 5000 4000 3000 2000 1000 0 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 India: Stock of Reserves and Sterilization Instruments 1,200 160 Govt Securities 1,000 140 Repos Stock of foreign exchange reserves (RHS) 600 (in billions of USD) 120 MSB 100 400 80 200 60 0 40 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 -200 20 -400 0 (in billions of USD) 800 China: PBC Bill Rates vs. U.S. Treasury Yields 5.0 4.5 4.0 U.S. rates 3.5 3.0 2.5 2.0 PBC rates 1.5 1.0 0.5 PBC 3-month PBC 1-year U.S. 3-month U.S. 3-year 0.0 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 India Domestic Bond Yields vs. U.S. Treasury Yields 7.0 6.0 India Rates 5.0 4.0 3.0 2.0 India Govt Securities - 1 year U.S. Rates India Repo Rate U.S. 3-month 1.0 U.S. 3-year 0.0 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 What Are Countries Doing with Reserves? Actions and Proposals U.S. bonds (Treasury and Agency) Other industrial country treasury paper Bank recapitalization (China) Infrastructure investment (India) Korea Investment Corporation Improving Risk-Return Profile of Reserves Diversify into non-U.S. $ denominated instruments, gold Regional pooling of reserves—e.g., Asian Investment Corporation (Genberg et al.) Invest reserves in broader range of instruments including foreign equities Asset management by IMF and World Bank (Summers) Other Policy Actions Tighter controls on inflows Liberalization of outflows: • Firms (retain fx earnings, borrow in fx) • Households • Institutional investors (QDII) Is There a Way to Do Better? How to Achieve Multiple Objectives? • Get benefits of inflows • Reduce costs of sterilization and fx exposure of Central Banks • Lower risks of capital account liberalization The Prasad-Rajan Proposal Inflows Reserves $ $ Central Bank RMB Liquidity RMB CB Bills Inflows Investments Controlled Outflows: $ $ Quantity + Timing $ Central Bank Closed-end RMB Mutual Fund Financial Market RMB Liquidity Development RMB Shares International Portfolio Diversification Sterilization Other Benefits Provides breathing room for some macroeconomic reforms (fx flexibility) Fx risk taken off Central Bank’s balance sheet Securitizing inflows may facilitate reduction in external borrowing costs Could complement other approaches such as QDII Potential Concerns Could delay more fundamental reforms Governance problems Multiple exchange rates Rents to mutual funds if excess demand for securities Fx risk transferred to households No demand for securities if expectation of currency appreciation The Proposal in a Broader Context The Macroeconomic Implications Of Financial Globalization: A Reappraisal And Synthesis Ayhan Kose, Eswar Prasad, Kenneth Rogoff, Shang-Jin Wei The Traditional View More efficient international allocation of capital Financial Globalization Capital deepening GDP growth Csmn. volatility International risk sharing A Different Perspective Financial Globalization Financial market development Institutions, governance Macroeconomic discipline Competition Collateral Benefits GDP growth Csmn. volatility Factors that Influence Outcomes of Financial Integration: Threshold Effects Financial Sector Development Institutions, Governance Macro Policies Trade Openness Exchange Rate Regime TENSION !! Financial integration helps developing countries to improve their financial markets, enhance governance, impose discipline on macro policies, break power of interest groups that block reforms, etc. But, in the absence of a basic pre-existing level of these supporting conditions, financial integration can wreak havoc What’s a Country to Do? Trade integration to begin with; but often results in de facto financial integration. Works okay, but not ideal substitute Collateral benefits perspective can guide country-specific sequencing of capital account opening Controlled capital account liberalization if experiencing inflows, external circumstances favorable