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on International Finance |
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Issue of 2012‒01‒18
eight papers chosen by Vimal Balasubramaniam National Institute of Public Finance and Policy |
| By: | Yap, Josef T. |
| Abstract: | Many have argued that the major source of the existing global macroeconomic imbalances are the twin deficits of the United States (US). However, there is still a debate about whether the global imbalances indeed pose a significant threat to the world economy. This matter is settled by arguing that the global imbalances acted as a `handmaiden` to the 2008 financial crisis. One way to reduce global imbalances is to reform the international monetary system and reduce the role of the US dollar as a reserve currency. Robert Triffin was one of those critical of this “exorbitant†privilege granted to the US, which makes it both a system maker and privilege taker. The Triffin Dilemma captures the fundamental instability that underlies the dollar reserve system. However, there are major obstacles to this proposal. Some analysts including Triffin cited the US security umbrella as the primary reason the US and its major allies would want to retain the role of the dollar in global trade and finance despite the underlying inequities in the system. This is related to the imbalance in global governance which is largely US-centric. The imbalance in global governance is also reflected in the dominance of the US financial system brought about by the “first-mover advantage.†Because of the inertia brought about by the imbalance in global governance, economic arguments to reform the international monetary system are likely to be trumped by political reality. The paper analyzes whether current efforts in East Asia in terms of financial and monetary cooperation and rebalancing of economic growth could significantly mitigate the adverse impacts of a global system that will still be dominated by the US dollar in the foreseeable future. It also explains why the People`s Republic of China (PRC) is unlikely to make significant unilateral adjustments to reduce global macroeconomic imbalances. |
| Keywords: | reserve currency, fiduciary system, global imbalances, Triffin Dilemma |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:phd:dpaper:dp_2011-13&r=ifn |
| By: | Zsolt Darvas |
| Abstract: | In a paper on the effects of the global financial crisis in Central and Eastern Europe (CEE), the author reacts to a paper of Aslund (2011) published in the same issue of "Eurasian Geography and Economics" on the influence of exchange rate policies on the region’s recovery. The author argues that post-crisis corrections in current account deficits in CEE countries do not in themselves signal a return to steady economic growth. Disagreeing with Aslund over the role of loose monetary policy in fostering the region’s economic problems, he outlines a number of competitiveness problems that remain to be addressed in the 10 new EU member states of CEE, along with improvements in framework conditions supporting future macroeconomic growth. |
| Keywords: | Central and Eastern Europe, Baltic states, exchange rate policy, global financial crisis, floating exchange rate, fixed exchange rate, inflation, internal devaluation, credit boom, overheating economy, current account balance, negative output gap, euro area, unit labour costs, price competitiveness |
| JEL: | F30 F40 F50 P26 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:mkg:wpaper:1103&r=ifn |
| By: | Yavuz Arslan; Mustafa Kilinc; M. Ibrahim Turhan |
| Abstract: | We analyze the global imbalances and the required adjustments for rebalancing in current accounts and real exchange rates. We set up a two-country two-sector model for the US-China with two asymmetries. First, we assume that the size of China initially is one third of the US but its size becomes half of the US in the next ten years consistent with the fast growth expectations in China. Secondly, we assume that China initially runs a net export surplus against the US. Then we quantitatively study two adjustment scenarios. First scenario, called Slow Adjustment, assumes that in the process of growth, Chinese demand composition moves more towards domestic non-tradable sector. In this case, Chinese real exchange rate appreciates gradually and net export surplus also decreases slowly. Second scenario, called Quick Adjustment, assumes that in addition to the higher non-tradable share in output, net export surplus against US goes to zero quickly in ?ve years. In this case, net export adjustment happens quickly and real exchange rates in China also appreciate faster and at a higher rate than Slow Adjustment case. Even though, global imbalances are eliminated faster in the Quick Adjustment case, high real appreciation in China hurts importers in the US. A comparison in terms of output shows that Slow Adjustments is preferred for both countries. |
| Keywords: | Global imbalances, Current accounts, Exchange rate adjustments |
| JEL: | F32 F36 F41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1127&r=ifn |
| By: | Xu, T.T. |
| Abstract: | The recent financial crisis raises important issues about the role of credit in international business cycles and the transmission of financial shocks across country borders. This paper investigates the international spillover of US credit shocks and the importance of credit in explaining business cycle fluctuations using a global vector autoregressive (GVAR) model with credit, estimated over the period 1979Q2 to 2006Q4 for 26 major advanced and emerging economies. Results from the country-specific models reveal the importance of bank credit in explaining output growth, changes in inflation and long term interest rates in countries with developed banking sector. The generalized impulse response function (GIRF) for a one standard error negative shock to US real credit provides strong evidence of the spillover of US credit shock to the UK, the Euro area, Japan and other industrialized economies. |
| JEL: | C32 G21 E44 E32 |
| Date: | 2012–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1202&r=ifn |
| By: | Lin, Justin Yifu; Treichel, Volker |
| Abstract: | The world is currently still struggling with the aftermath of the worst economic crisis since the Great Depression. Following a description of the eruption, evolution and consequences of the global crisis, this paper reviews alternative hypotheses for the causes of the global financial crisis as well as their empirical evidence. The paper refutes the frequently voiced view that the global crisis was caused by global imbalances that reflected economic policies of East Asian countries. Instead, it argues that global imbalances were the result of excess demand in the United States, resulting from both the public debt in the United States arising from the Afghanistan and Iraqi wars and tax cuts and the overconsumption by households supported by the wealth effect from the housing bubble in the United States. The housing bubble itself was the outcome of the Federal Reserve's low interest rate policy in the aftermath of the burst of the"dot-com"bubble in 2001, the lack of appropriate financial regulation, and housing policies aimed at expanding the mortgage market to low-income borrowers. It was possible to maintain the large trade deficits of the United States for such a long period of time because of the dollar's reserve currency status. When the housing bubble in the United States burst, the global crisis ensued. The paper also analyzes why China's trade surplus increased significantly in general and with the United States in particular in recent years, and argues that this increase was caused by both the relocation of the labor-intensive tradable sector of East Asian economies to China and high corporate saving rates in China as a result of its dual-track approach to reform. |
| Keywords: | Debt Markets,Currencies and Exchange Rates,Emerging Markets,Economic Theory&Research,Access to Finance |
| Date: | 2012–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5937&r=ifn |
| By: | Tang, Hsiao Chink (Asian Development Bank) |
| Abstract: | This paper examines the impact of intra-Asia exchange rate volatility on intra-Asia trade in primary goods, intermediate goods, equipment goods, and consumption goods from 1980 to 2009. For Asia, the evidence shows that as intraregional exchange rate volatility increases, intraregional exports in these goods fall. This adverse impact is even more pronounced in the sub-region of Association of Southeast Asian Nations (ASEAN)+5 comprising ASEAN member countries plus the People's Republic of China; Hong Kong, China; Japan; the Republic of Korea; and Taipei,China; and especially among intermediate and equipment exports. Again, the impact magnifies in an even smaller sub-group excluding the smaller ASEAN economies. These results underline the significant impact of exchange rate volatility on the region's production networks. For South Asia, however, exchange rate volatility appears to have a positive impact on exports. Still, caution is warranted given that South Asian economies trade relatively little with each other. |
| Keywords: | exchange rate volatility; trade; ASEAN; East Asia |
| JEL: | F10 F14 F31 |
| Date: | 2011–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbrei:0090&r=ifn |
| By: | Benjamin Carton |
| Keywords: | Impossible Trinity, Monetary Policy, CHINA |
| JEL: | F32 F33 A I E A |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2011-27&r=ifn |
| By: | Esteban Perez-Caldentey; Matias Vernengo |
| Abstract: | Conventional wisdom suggests that the European debt crisis, which has thus far led to severe adjustment programs crafted by the European Union and the International Monetary Fund in both Greece and Ireland, was caused by fiscal profligacy on the part of peripheral, or noncore, countries in combination with a welfare state model, and that the role of the common currency-the euro-was at best minimal. This paper aims to show that, contrary to conventional wisdom, the crisis in Europe is the result of an imbalance between core and noncore countries that is inherent in the euro economic model. Underpinned by a process of monetary unification and financial deregulation, core eurozone countries pursued export-led growth policies-or, more specifically, "beggar thy neighbor" policies-at the expense of mounting disequilibria and debt accumulation in the periphery. This imbalance became unsustainable, and this unsustainability was a causal factor in the global financial crisis of 2007-08. The paper also maintains that the eurozone could avoid cumulative imbalances by adopting John Maynard Keynes's notion of the generalized banking principle (a fundamental principle of his clearing union proposal) as a central element of its monetary integration arrangement. |
| Keywords: | European Union; Current Account Adjustment; Financial Aspects of Economic Integration |
| JEL: | F32 F36 O52 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_702&r=ifn |