Download INTERNATIONAL CAPITAL MOVEMENTS: OLD AND NEW DEBATES On Alternative Exchange Regimes

INTERNATIONAL CAPITAL MOVEMENTS:
OLD AND NEW DEBATES
On Alternative Exchange Regimes
when the Capital Account is Open
Erdem Başçı
Deputy Governor
Central Bank of Turkey
Cusco (Peru), 19-20 July 2010
Exchange Rate Regimes
• Fixed
• Floating
2
Issues
• Durability
• Desirability
3
Argument
‘Floating exchange rate regime
is both more durable and more
desirable when there are no
capital account restrictions.’
4
Durability
• Credibility
– Fiscal, debt sustainability
– Monetary, reserve adequacy
– Financial, open positions
• Term structure of inflows
– Debt
– Foreign Direct Investments
5
Desirability - 1
• Control of Domestic Money Supply
• Control of Foreign Currency
Reserves
• Stabilization of
– Output
– Inflation
6
Desirability - 1
Country Groups with respect to FX regimes and
Growth Rates* (2007 Q1 - 2010 Q1, annual percentage)
12
Country Groups with respect to FX regimes and
Inflation Rates* (Jan 2005 – May 2010, annual percentage)
16
Countries with Pegged
Exchange Rate Regimes
14
8
Countries with Floating
Exchange Rate Regimes
12
4
10
0
8
-4
Countries with Pegged
Exchange Rates
6
-8
Countries with Floating
Exchange Rate
4
2
-12
I
II
III
2007
IV
I
II
2008
III
IV
I
II
III
2009
IV
I
2010
* Fixed exchange rate countries: Lithuania, Estonia, Latvia, Russia, Bulgaria, Denmark, Hong
Kong (IMF, 2008, De Facto Classification of Exchange Rate Regimes and Monetary Policy
Frameworks, Washington, DC)
Source: Cinar B., Erdogan O., Gurgur T., Polat T. (2010), “Global Crisis, Propagation Channels
and Turkish Economy”, CBT Economy Notes; Bloomberg; IMF; TURKSTAT; CBT
0
2005
2006
2007
2008
2009
2010
* Fixed exchange rate countries: Lithuania, Estonia, Latvia, Russia, Bulgaria, Denmark,
Hong Kong (IMF, 2008, De Facto Classification of Exchange Rate Regimes and Monetary
Policy Frameworks, Washington, DC)
Source: Cinar B., Erdogan O., Gurgur T., Polat T. (2010), “Global Crisis, Propagation
Channels and Turkish Economy”, CBT Economy Notes; Bloomberg; IMF; TURKSTAT; CBT
7
Desirability - 1
Floating
Control of money
Control of FX
reserves
Output stabilization
Inflation stabilization
Fixed
a
a
a
a
8
Desirability - 2
• Predictability
– Exchange rates
– Interest rates
• Efficiency (under price stickyness)
– Productivity and taste shocks
– Financial (expectations) and fiscal
shocks
9
Desirability - 2
Floating
Exchange rate
predictability
a(?)
Interest rate
predictability
a
Efficiency under real
shocks
a
Efficiency under
financial shocks
Fixed
a(?)
10
Learning to live under Float
How to avoid ‘fear of floating’?
• Reduce liability dollarization
• Reduce pricing in foreign
currencies
• Diversify your industrial
organization (Helpman, 2006)
11
Dollarization in Turkey
Share of FX Deposits in Total Deposits*
Share of FX Loans in Total Loans*
(Mar 97 – Jun 10)
(Mar 97 – Jun 10)
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
97
98
99
00
*Deposit Banks
Source: BRSA, CBT
01
02
03
04
05
06
07
08
09
10
97 98 99 00 01 02 03 04 05 06 07 08 09 10
*Total credits extended by deposit, development, investment and participation
banks along with consumer financing firms (including the credits granted by
the domestic banks' branches abroad)
Source: BRSA, CBT
12
Dollarization in Turkish Public Debt
Currency and Interest Rate Composition of
Gross Outstanding Debt of Central Government
(2003 - 2010)
100%
90%
80%
46.3
41.5
37.6
37.2
2005
2006
31.3
33.8
2007
2008
29.1
28.6
2009
2010
70%
60%
50%
40%
30%
20%
10%
0%
2003
2004
Fixed
Variable
FX / FX Indexed
Source: Treasury, CBT
13
INTERNATIONAL CAPITAL MOVEMENTS:
OLD AND NEW DEBATES
On Alternative Exchange Regimes
when the Capital Account is Open
Erdem Başçı
Deputy Governor
Central Bank of Turkey
Cusco (Peru), 19-20 July 2010
14