Download ECONOMIC DEVELOPMENT & INTERNATIONAL POLITICS

Fixing the exchange rate
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Plan
1. Exchange rate and protectionism
2. International reserve currencies
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Exchange rates & protectionism
• “Currency manipulator” ??
• Should the WTO be involved in regulating
the exchange rate?
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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
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Brazilian exports getting crushed by currency appreciation
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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
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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
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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
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http://www.ft.com/intl/cms/s/0/7e010a5a-8324-11e1-9f9a-00144feab49a.html#axzz1rjqaPoVT
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• Complaints from Mexico
• But even as their currency appreciated, it was far below where it
was before the crisis
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http://www.bea.gov/newsreleases/international/transactions/transnewsrelease.htm
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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
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The Euro
• The ultimate commitment
• So, if it’s credible, will it overtake the dollar
as the international reserve currency?
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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.
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http://www.imsdb.com/scripts/Good-Will-Hunting.html
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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%
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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?)
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Is the renminbi an alternative?
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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
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Japan
• How would you describe the Japanese Diet?
a) Low in poly-saturated fats
b) A parliament
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Japan’s Diet rejects central bank pick
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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.
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If the parliament selects the Prime
Minister / Government, why would
they reject the government?
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Bicameral!
– House of Representatives
– House of Councillors
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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).
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?
Prime Minister Noda must enjoy the
confidence of the House of
Representatives to remain in office
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Japan’s Diet rejects central bank pick
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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.
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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.
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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.
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AND: Last month “took various measures to ensure a smooth supply of funds
for the nation’s small to medium-sized enterprises”
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BUT: “refrained from increasing asset purchases”
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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.“
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“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”?
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Why have the Swiss been more successful in bringing down the
franc than the Japanese have been in bringing down the yen?
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Is the SDR an alternative?
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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
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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”
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Thank you
WE ARE GLOBAL GEORGETOWN!
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