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Reserve accumulation and financial stability

October 14th, 2008 12:33pm
by FT

By Maurice Obstfeld, Jay C. Shambaugh and Alan M. Taylor

Since the early 1990s, central banks in many emerging markets and developing countries have accumulated foreign reserves at an unprecedented rate. The macroeconomic impact of these official flows has been profound and they have contributed significantly to global imbalances. Providing an explanation for these trends remains a major puzzle in international macroeconomics, and prevailing theories based on trade or debt deliver poor empirical performance. We argue that part of this great reserve accumulation is a response to the threat of financial instability in the context of rapidly expanding financial systems, increasingly mobile capital, and exchange rate objectives. The recent turbulence in global financial markets supports this view. Continue reading "Reserve accumulation and financial stability"

October 14th, 2008 12:33pm in Capitalism, Central banks, Currencies, Emerging economies, Globalisation, World trade | Permalink | Comment

Emu’s second 10 years may be tougher

May 28th, 2008 4:56am
by Martin Wolf

By Martin Wolf

“A full decade after Europe’s leaders took the decision to launch the euro, we have good reason to be proud of our single currency. The Economic and Monetary Union and the euro are a major success.” Self-congratulation is in order at birthday parties. So nobody should be surprised at the effusive remarks in the foreword by Joaquín Almunia, commissioner for economic and monetary affairs, to an excellent study of “Emu@10” (sic).*

How could anybody dare to question the achievements of the single currency? It is considered a credible rival to the US dollar. Jeffrey Frankel of Harvard even predicted in March that the “euro could replace the dollar within 10 years”.** This is a far cry from the scepticism, particularly in English-speaking circles, that greeted both its launch and the subsequent period of declining value against the US dollar. This is a credible currency.

The remainder of this column can be read here. Debate from our panel of economists appears below.

Read the debate - contributors so far include Desmond Lachman, Roland Vaubel and Alberto Alesina

May 28th, 2008 4:56am in Currencies, Eurozone | Permalink | Comment

The Fed is delaying the day of reckoning

March 12th, 2008 5:55pm
by FT

By Charles Wyplosz

In 1971, with the greenback weak and falling, US Treasury secretary John Connally famously told the rest of the world that the US dollar was “our currency and your problem”. Thirty years later, with the dollar strong and still rising, Robert Rubin, his successor, no less famously stated that “a strong dollar is in the interest of the United States”.

These days, because the dollar is weak and falling, we would have expected US officials to return to Connally’s mantra but they unexpectedly chose Rubin’s. On reflection, glorifying a strong dollar when it is so weak means they do not care. Connally without compassion, if you prefer.

Jean-Claude Trichet, president of the European Central Bank, is thereby left bemoaning “excessive exchange rate moves”. This, too, is an extraordinary statement. In the past week the dollar has barely lost 1 per cent vis a vis the euro. That is significant, but “excessive”? Yes, he may be reacting to the 6 per cent dollar depreciation in the past month. Or to the 17 per cent change over the past 12 months. Or perhaps the 31 per cent depreciation since the dollar was last strongish in late November 2005.

Well, currencies float. They are bound to be sometimes overvalued and sometimes undervalued. This is what they do and these numbers are not especially large by historical standards. Margaret Thatcher, former UK prime minister, was right when she said that exchange rates were a matter for markets to decide.

Of course, markets react to monetary policies. As the US economy faces a recession, a weak dollar is in the country’s interests. As inflation exceeds its own definition of price stability, a strong euro is in the interests of the eurozone. End of story? Not quite. (Continued)

Charles Wyplosz is professor of economics at the Graduate Institute of Geneva. The remainder of his column can be read here. Comment from our expert panel and guest members can be read below.

March 12th, 2008 5:55pm in Credit squeeze, Currencies, Eurozone | Permalink | Comment

We must curb international flows of capital

February 26th, 2008 1:28pm
by FT

By Dani Rodrik and Arvind Subramanian

First large downhill flows of capital – from rich countries to poor countries – led to the Latin American debt crisis of the early 1980s. In the 1990s similar flows begat the Asian financial crisis.

Since 2002 the flows have been uphill, from emerging markets and oil-exporting countries to the developed world, especially the US. But the outcome has not been very different. So, it does not seem to matter how capital flows. That it flows in sufficiently large quantities across borders – the celebrated phenomenon of financial globalisation – seems to spell trouble.

Causes and consequences vary, depending on which way capital flows. Developing country borrowing was associated with unsustainable fiscal policies (Latin America) and inappropriate exchange rate policies (Asia). But the financial sector was not blameless: for every overborrower there was an overlender.

The pathologies were different when the US went on a borrowing binge. Large current account surpluses and the associated savings glut in the rest of the world fed a global liquidity boom, which stoked asset prices. Even though the roots of the subprime crisis lie in domestic finance, international capital flows magnified its scale.

The remainder of this column can be read here. Debate from our panel of economists appears below.

February 26th, 2008 1:28pm in Credit squeeze, Currencies, Emerging economies, Globalisation | Permalink | Comment

Why sterling is the next dollar

January 11th, 2008 4:50pm
by Martin Wolf

By Martin Wolf

Will sterling follow the US dollar? As Willem Buiter pointed out last week (The silver lining in sterling’s decline, January 4), this is highly likely. Movements in exchange rates are, to put it mildly, unpredictable. But this one ought to happen. It should also be welcomed. This possibility was, indeed, why the UK had to keep out of the eurozone.

Like the US, the UK has had buoyant credit growth, huge rises in house prices, low private and national savings and a sizeable current account deficit. Like the US, it also absorbed the surplus savings of much of the rest of the world in the 2000s. It is, in short, one of the canonical “Anglo-Saxon” economies.

Yet, in many respects, the UK position is worse than that of the US. The run-up in UK house prices, for example, was much bigger than in the US. On almost any measure, housing valuations and household indebtedness are still more extreme. To take one example, at the end of 2006, household mortgage debt was 126 per cent of disposable income, against a mere 104 per cent in the US.

Moreover, the UK’s current account deficit, at 5.7 per cent of GDP in the third quarter of 2007, was bigger than that of the US. Indeed, it was bigger even than it seems. As Andrew Smithers of London-based research company Smithers & Co argues, the deficit is significantly understated by current statistical conventions. Retained earnings of direct investment are included in data on investment income, but this is not the case for portfolio investment. Since a high proportion of UK-based multinationals are owned by foreign portfolio investors, this exaggerates the UK’s net investment income. The UK’s true current account deficit may have been close to 7 per cent of GDP.

The remainder of this column can be read here. Debate from our panel of economists appears below.

January 11th, 2008 4:50pm in Currencies | Permalink | Comment

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