Policymaking in crises: Pick your poison
Kristin Forbes, Michael W Klein 24 December 2013
Government interventions to control capital flows and reduce exchange-rate volatility have long been controversial. The Global Financial Crisis has made the debate more urgent. This column discusses recent research that evaluates such policies against the counterfactual of no intervention. Depreciations and reserve sales can boost GDP growth during crises, but may also substantially increase inflation. Large increases in interest rates and new capital controls are associated with reductions in GDP growth, with no significant effect on inflation. When faced with sudden shifts in capital flows, policymakers must ‘pick their poison’.
In 2010, the Brazilian finance minister Guido Mantenga declared a ‘currency war’ because of the harmful effects of the strengthening of the real. He blamed the currency’s appreciation on easy money in advanced countries, and to a lesser extent on reserve accumulation in some emerging markets. More recently, concerns were raised by slides in the values of the Indian rupee – which lost 18% of its value against the dollar between February and August – and by the fall in the value of the Indonesian rupiah – which has lost almost a quarter of its value against the US dollar in 2013.
Exchange rates Macroeconomic policy
exchange rates, foreign exchange reserves, India, Indonesia, global financial crisis, capital controls, Brazil, currency war
Overcoming the obstacles to international macro policy coordination is hard
Olivier Blanchard, Jonathan D Ostry, Atish R Ghosh 20 December 2013
The world has just been through a period of unprecedented macro policy activism. More is set to come as central banks exit unconventional policies, governments fix their fiscal positions, and financial regulations are reformed. These national policies have undeniable international spillovers. This column argues that the setting is ripe for more cooperation and suggests some ways forward, even if international macro policy coordination may continue to be heard about more often than it is seen.
International policy coordination is like the Loch Ness monster – much discussed but rarely seen. Going back over the decades, and even further in history to the period between the two world wars, coordination efforts have been episodic.
Coordination seems to occur spontaneously in turbulent periods, when the world faces the prospect of some calamitous outcome and the key players are seeking to avoid cascading negative spillovers. In quieter times coordination is rarer, though not unheard of – the Louvre and Plaza accords are examples.
spillovers, fiscal consolidation, financial regulation, policy coordination, unconventional monetary policy, currency war
Tapering talk: The impact of expectations of reduced Federal Reserve security purchases on emerging markets
Barry Eichengreen, Poonam Gupta 19 December 2013
Fed tapering has started. A revival of last summer’s emerging economy turmoil is a real concern. This column discusses new research into who was hit and why by the June 2013 taper-talk shock. Those hit hardest had relatively large and liquid financial markets, and had allowed large rises in their currency values and their trade deficits. Good macro fundamentals did not provide much insulation, nor did capital controls. The best insulation came from macroprudential policies that limited exchange rate appreciation and trade deficit widening in response to foreign capital inflows.
In May 2013, Federal Reserve officials first began to talk of the possibility of the US central bank tapering its securities purchases from $85 billion a month to something lower. A milestone to which many observers point is 22 May 2013, when Chairman Bernanke raised the possibility of tapering in his testimony to Congress. This ‘tapering talk’ had a sharp negative impact on economic and financial conditions in emerging markets.
Three aspects of that impact are noteworthy:
Exchange rates Monetary policy
exchange rates, monetary policy, Federal Reserve, emerging markets, capital controls, Macroprudential policies, Capital inflows, currency war, tapering
Root causes of currency wars
Simon J Evenett 14 February 2013
Discussion of currency wars has broken out again in the run-up to this week’s G20 finance ministers' meeting in Moscow. This column points to the underlying policy choices responsible for the recurring currency disputes and the feeble ex-post rationalisations for them.
Once dismissed as self-serving grandstanding by the Brazilian finance minister in 2010, claims that the world is closer to a currency war have returned. This time the proximate cause appears to be the publicly stated policies of the new Japanese government aimed at shaking off a decades-long economic malaise. Is this another flash in the pan – or are there deeper factors at work (Bordo et al 2012)?
An overlooked currency war in Europe
Daniel Gros 11 October 2012
Switzerland has pegged its currency to the euro at a level that helps it sustain a 12% current-account surplus and one of the lowest unemployment rates in Europe. This column argues that the Swiss peg involves currency manipulation that is, as far as Europe is concerned, the same order of magnitude as China’s intervention. It has had a significant impact on the euro exchange rate and a non-negligible effect on the EZ economy.
A current-account surplus is the mirror image of a capital export. A country that is running persistent current-account surpluses is thus persistently exporting capital. An important question to consider is which sector is investing abroad, the private or the public sector? If it is the public sector which invests abroad, in particular if it is done by the central bank via the accumulation of foreign-exchange reserves, this is often called ‘currency manipulation’.
currency war, Swiss franc peg, euro exchange rate