Download Assessment of alternative international monetary regimes

GLOBAL IMBALANCES: DO NET CAPITAL
FLOWS STILL MATTER? AN INTERNATIONAL
MACROECONOMIC PERSPECTIVE
Hélène Rey
London Business School, CEPR and NBER
De Nederlandsche Bank, 2013
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Draw on:
“Exorbitant Privilege and Exorbitant Duty”, with
Gourinchas and Govillot (2012)
“The Financial Crisis and the Geography of Wealth
Transfers”, with Gourinchas and Truempler (2012)
Reforming the International Monetary System with
Farhi and Gourinchas (2012)
Chapter for Handbook of International Economics, in
preparation, with Gourinchas
Financial Globalization
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Large increase in international investment positions
especially among advanced economies
Trade in financial assets has outpaced trade in
goods and services
Financial globalization has gathered pace since the
1990s.
[Figure]
French external assets and liabilities
(1970-2010; % of GDP)
300%
250%
200%
150%
assets/GDP
liabilities/GDP
100%
50%
0%
Source: Lane and Milesi-Ferretti updated External Wealth of Nations Database
Financial crises
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International economists traditionally look at current
account deficits to predict crises or to forecast
consequences of crises.
Financial globalization makes net capital flows less
relevant.
Gross capital flows are now key to understand the
transmission of international crises.
External balance sheets
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Large cross border positions are a vector of both
risk sharing and financial contagion
Emerging markets and advanced economies have
very different external portfolios
Advanced economies are long in risky assets,
emerging markets are long in safer assets (reserves)
Structure of debt portfolio key to understand crisis
transmission (Treasuries versus private label AAA
assets)
Net external risky assets position (% of GDP)
20%
10%
0%
-10%
-20%
-30%
-40%
1970
1975
1980
1985
1990
G7
BRIC
1995
2000
2005
2010
US external assets
Source: “Exorbitant Privilege and Exorbitant Duty” (Gourinchas, Rey and Govillot (2012))
US external liabilities
Source: “Exorbitant Privilege and Exorbitant Duty” (Gourinchas, Rey and Govillot (2012))
The World Banker
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The United States is the centre country of the
International Monetary System
The United States is the world banker:
US issues short-term low-risk assets (T-bills)
US invests in high risk foreign assets (foreign equity
and direct investment)
Earns excess returns on its external position:
“exorbitant privilege”.
The United States as a Global Insurer
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During latest crisis, US net foreign asset position
deteriorated massively:
Between 2007:4 and 2009:1, Net Foreign Assets
drop by about USD 2.9 tr.
US liabilities held up well (US issuer of the reserve
currency, safe haven) and risky assets plummeted.
A deterioration in the Net Foreign Asset position is a
wealth transfer to the rest of the world.
Similar to an insurance payment in crisis time.
Other insurers
Currency gains and losses
Balance sheets matter
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Geography of wealth transfers during the crisis
Different fortunes depending on portfolio structure
Countries long equity or FDI tend to have valuation
losses
Structure of debt portfolio key: government debt
versus corporate debt
Correlation of losses with ABCP conduits, ABS
investments, dollar shortage measure and losses on
debt portfolio
Future: A New Triffin Dilemma?
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In the 1960s currencies could be exchanged at a fixed
rate against the dollar whose value was fixed against
gold.
Triffin observed that global liquidity demand was
outgrowing the United States’ gold reserves (backing
the dollars held abroad).
Maintaining the gold value of the dollar was
increasingly difficult.
Similarly, fiscal capacity of the dollar is not unlimited
Backing of the dollar assets becomes gradually smaller
in a world where relative size of the US shrinks.
New Triffin Dilemma
Conclusions
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Solving the New Triffin Dilemma (Farhi Gourinchas
Rey 2011): develop alternatives to US Treasuries as
the dominant reserve asset: multipolar system with
the issuance of mutually guaranteed European
Bond; open up Chinese financial account,
convertibility of the yuan.
More broadly: tracking external balance sheet of
countries useful to understand financial
vulnerabilities.