Download A New Paradigm for Asian Development

What’s Up with the
Exchange Rate?
Andrew K. Rose
UC Berkeley, NBER and CEPR
December, 2009
The Basic Long-Run Issue
 America’s Current Account Deficit
– 2008: $706.1 billion deficit (!)
 4.9% of American GDP
 Implies required Capital Inflows of over $2300 per
person annually (!)
 High, but actually declining recently
– 2009Q2: deficit declining to $98.8 billion
– Almost all Goods (Services in surplus but small)
 Small persistent income surplus
 Trade imbalance shrinking because of imports (!)
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US as International Debtor
 Stock of US Net International Debt: $3,469.2
billion (end 2008)
– Around 24% of American GDP
– Around $11,400 per American
– Up from $2,139.9 billion in 2007
– Continuing flows of deficits add to stock of debt
– America: persistent current account deficits
since 1991
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Causes
 Some Dispute among Economists
 Current Account is difference between (low)
Domestic Savings and (higher) Investment
 Low American Savings chief reason
– Personal Savings very low lately
 Sometimes negative, though recent increase
– Public Sector also dis-saving (Federal deficits)
 Very large increase of late (stimulus, TARP, …)
 Lack of Investment outside US possible
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Current Account: Sustainable?
 Size of Debt Stocks unprecedented for US
– Deficit Flow near all-time high as well
 Also unprecedented for “Anchor” country
– US now takes >75% all global savings flows
 Capital running “uphill” from poor to rich (!)
 Growing US external debt
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Adjustment must involve Prices
 For current account to close, savings must
rise (or investment fall, or both)
 Symmetrically, exports must rise
dramatically, while import growth slows
 Exchange Rate one of the key adjustment
mechanisms
 So long-run depreciation of Dollar is likely
– Special role of dollar in commodity prices
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Long-Run Trend: Depreciation
 Interrupted Briefly by Financial Crisis in Fall
2009
– US Treasuries acted as “safe haven”
– Very low (negative!) interest rates
– Temporary Dollar Appreciation
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Trend Clear in Data
130
120
110
100
90
28jan2002
30nov2009
Sept 15, 2008 marked
Trade Weighted Effective Dollar Exchange Rate
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How Much More?
 Many Different Estimates, Little Consensus
 Most expect at least another 10-25% on
overall (multilateral) rate, sometimes more
 Exchange Rates often overshoot
 Timing: almost impossible
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Where will Effects be Felt?
 Three Big Currencies in World:
– Dollar
 Periphery of countries that fix against dollar
 Ex: China, HK, Panama, Ecuador, …
– Euro
 Periphery of euro-fixers
 Ex: Baltics, Bulgaria, Denmark, …
– Yen
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Exchange Rate Policy Varies
 Dollar floats freely against many currencies
– Major currencies (Euro and Yen)
– True also of Inflation Targeters
 Europeans (UK, Norway, Switzerland, …)
 Latins (Brazil, Mexico, Argentina, …)
 Others (Canada, NZ, Australia, Korea, …)
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Trend and Transient Appreciation
1.2
1.6
1.4
1
1.2
.8
1
.6
28jan2002
27nov2009
.8
28jan2002
Euro/$
27nov2009
Canadian $/$
4
140
3
120
2
100
1
28jan2002
27nov2009
80
28jan2002
27nov2009
Old Home of Carry Trade
Brazilian Real/$
Japanese Yen/$
Major Bilateral Dollar Rates
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Much of Asia is Different
 Asians take Exchange Rate Policy Seriously
 Almost all East Asians manage currencies,
will continue to do so
 Part a Legacy of Asian Crisis of ’97-’98
 Part a Development Strategy …
– Which Leads us to China
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China Manages Exchange Rate
8.5
8
7.5
7
6.5
28jan2002
27nov2009
Chinese Yuan/$
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How to Think about the Yuan?
 Chinese Communist Party Needs Growth to
Survive Politically
– Growth is Required to Absorb Massive
Unemployment in Chinese Countryside
 Agricultural Peasants Must Be Transformed
Into Manufacturing Workers
– Exports Provide One Possible Outlet
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Asian Paradigm for Development
 Competitive (Cheap) Unemployed Labor
Absorbed into Manufactured Sector
– Example of key theory of W.A.Lewis (Nobel
Laureate)
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Implications for West
 China has every incentive to maintain
under-valued exchange rate
– Under-valuation the key to rapid export growth
– Right in theory
– Effective in practice (past twenty years!)
– Hence rapid accumulation of US$ reserves, as
China maintains under-valued peg to US
– Reserves act as “collateral”, encourage FDI
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Special Role of USA




US is issuer of $, global reserve currency
Many East Asians fixe against US$
US is largest, most open economy
US willing to handle large, persistent current
account deficits
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Special Role of USA, contd
 American FDI high in Asia
– High Returns on Asian Investments help protect
against American Protectionism
– China Importing Financial Services, since
Domestic Financial Sector Weak
– US also premier provider of collateral service
(hence Asian pegs against $)
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Where Does Europe Fit In?
 No Direct Role
 Still, Large Indirect Role
– Euro floats against $
– Europe has powerful central bank with
independent monetary policy
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Dollar Depreciation Likely to be
Mostly against Euro, non-Asians
 Some Already Occurred
 Dollar depreciated from .8$/euro to
1.5$/euro already
– Also pound and other Europeans
– Ditto Japan, Canada, Mexico, Australia, …
 More likely to come!
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Asia and the Euro
 Crisis in Confidence Possible
– American Current Account Deficits large
 5% GDP, highly persistent
 Dollar Depreciation Resisted by Asians
– But Euro Floats Freely!
 Euro Likely to Continue to Appreciate
Against Dollar and Asians over long Term
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It isn’t Only China!
 Other Asian Economies Waiting in Line
behind China
– India
– Indonesia
– Vietnam …
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Historical Precedent
 European Development in 1950s and 1960s
 Export-Lead Growth to transfer underemployed Europeans from countryside to
manufacturing
 Revival of “Bretton Woods” regime,
prevailed before 1971
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Conclusion
 Dollar Decline likely to continue
 Probably Most Dramatically Against Euro
– Also Japan, small inflation-targeters (Canada,
Mexico, Korea, Norway, …)
 Good argument for foreign diversification!
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