Why is financial stability essential for key currencies in the international monetary system?
Linda Goldberg, Signe Krogstrup, John Lipsky, Hélène Rey 26 July 2014
The dollar’s dominant role in international trade and finance has proved remarkably resilient. This column argues that financial stability – and the policy and institutional frameworks that underpin it – are important new determinants of currencies’ international roles. While old drivers still matter, progress achieved on financial-stability reforms in major currency areas will greatly influence the future roles of their currencies.
Could the dollar lose its status as the key international currency for international trade and international financial transactions, and if so, what would be the principal contributing factors? Speculation about this issue has long been abundant, and views diverse. After the introduction of the euro, there was much public debate about the euro displacing the dollar (Frankel 2008). The monitoring and analysis included in the ECB’s reports on “The International Role of the Euro” (e.g.
Financial markets International finance
reserve currency, financial stability, dollar, capital flows, spillovers, Currency, SIFIs
Do capital controls deflect capital flows?
Paolo Giordani, Michele Ruta, Hans Weisfeld, Ling Zhu 23 June 2014
Capital controls may help countries limit large and volatile capital inflows, but they may also have spillover effects on other countries. This column discusses recent research showing that inflow restrictions have significant spillover effects as they deflect capital flows to countries with similar economic characteristics.
The size and volatility of capital flows to developing countries have increased significantly in recent years (Figure 1), leading many economists to argue that national policies and multilateral institutions are needed to govern these flows (Forbes and Klein 2013, Blanchard and Ostry 2012). The IMF itself has reviewed its position on the liberalisation and management of capital flows, while recognising that “much further work remains to be done to improve policy coordination in the financial sector” (IMF 2012, p. 28).
China, capital flows, spillovers, South Africa, capital controls, Brazil, Capital inflows, international capital flows
Spillovers from systemic bank defaults
Mark Mink, Jakob de Haan 24 May 2014
To date, much uncertainty exists about how large the spillovers would be from the default of a systemically important bank. This column shows evidence that the market values of US and EU banks hardly respond to changes in the default risk of banks that the Financial Stability Board considers globally systemically important (G-SIBs). However, changes in all G-SIBs’ default risk explain a substantial part of changes in bank market values. These findings have implications for financial-crisis management and prevention policies.
Financial-crisis management and prevention policies often focus on mitigating spillovers from the default of systemically important banks. During the recent crisis, governments avoided large bank failures by insuring and purchasing intermediaries’ troubled assets, by providing them with capital injections, and even by outright nationalisations. After the crisis, financial regulators designed additional requirements for those institutions that the Financial Stability Board designated as globally systemically important banks (G-SIBs).
financial stability, spillovers, regulation, banking, banks, systemic risk
The economic impact of inward FDI on the US
Theodore H. Moran, Lindsay Oldenski 04 March 2014
The US has once again ranked among the top two recipient countries for foreign direct investment. This column examines the effects of these large FDI inflows on the US domestic economy. Foreign multinationals are – alongside US-headquartered American multinationals – the most productive and highest-paying segment of the US economy. In addition, they provide positive spillovers to US firms. About 12% of the total productivity growth in the US from 1987 to 2007 can be attributed to productivity spillovers from inward FDI.
The US is the second-largest recipient of FDI in the world, behind China, and by far the largest target for FDI among OECD countries (OECD 2013). The numbers are large ($253 billion for the US), and the gap with the next-largest in the OECD is impressive ($63 billion for the UK and $62 billion for France in 2012).
Productivity and Innovation
R&D, US, productivity, wages, multinationals, FDI, spillovers
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
Multinationals assist domestic suppliers? Perhaps think again
Olivier N. Godart, Holger Görg, Christiane Krieger-Boden 29 April 2013
The positive spillovers from multinationals to the productivity of their host-country suppliers are empirically well established. Usually, it is assumed that multinationals aid their suppliers by voluntarily sharing knowledge and cooperating with them. This column argues the spillovers might rather result from blunt pressure by the multinationals, forcing their suppliers to adopt new practices and to adapt to new standards.
It is empirically well established that multinationals raise productivity levels of their local suppliers in their host countries. Firm-level data show that productivity of upstream industries is the higher the higher the importance of multinationals in downstream industries is (e.g. Javorcik 2004, Barrios et al. 2011).
Development International finance International trade
multinationals, spillovers, backward linkages
Beggar-thy-neighbours? Spillover effects of exchange rates
Aaditya Mattoo, Arvind Subramanian, Prachi Mishra 23 March 2012
Do exchange rate movements in one country affect its competitors? This column suggests that a 10% appreciation of the renminbi increases other developing countries’ exports by about 2%. Where competition with China is especially intense, the increase could be as large as 6%. The results imply that an appreciation of the renminbi could provide a boost to developing country exports.
Nearly all of the empirical research on exchange rates is focused on the impact of their changes on the country experiencing or undertaking them. This is true of the older, voluminous literature on the trade consequences of exchange rates (surveyed in Goldstein and Khan 1985), as well as more recent contributions like Rodrik (2008) and Berman et al. (2012). There is less evidence quantifying the effect of exchange rate movements on the exports of competitor countries, a classic case of spillover that, in its adverse manifestation, is dubbed the “beggar-thy-neighbour” effect.
China, spillovers, beggar-thy-neighbour
Clustering together abroad: South Korean multinationals in China
Peter Debaere, Joon H. Lee , Myungho Paik 03 June 2009
Gains from agglomeration may explain why investors choose the same location when going abroad, but why do firms from the same country cluster together? This column examines evidence from South Korean firms investing in China and finds that investors of the same nationality benefit from stronger forward and backward linkages with each other.
Foreign direct investment has played a prominent role in the current wave of globalisation. The World Investment Report (UNCTAD, 2008) notes that total worldwide FDI flows in 2007 amounted to 1.8 trillion dollars. More than 25% of these flows were to developing economies. China has received a major part of these FDI flows, and it has also been very active in trying to attract multinationals with export processing zones and tax incentives. It is no surprise then, that policymakers are eager to better understand the driving forces behind multinational relocation decisions.
spillovers, foreign direct investment, agglomeration
Economic spillovers from international environmental cooperation
Andrew K Rose, Mark M. Spiegel 02 July 2008
Prospects for international environmental cooperation often seem dim, as agreement must hew to the lowest common denominator. This column identifies economic gains from environmental commitments via reputational spillovers and their impact on capital flows. The evidence suggests that nations have more to gain from cooperation than they may realise.
Successful international environmental agreements (IEAs) must meet two important criteria:1 (1) Countries must sign up voluntarily, and (2) the agreements must be self-enforcing, in the sense that members of an IEA must have the capacity and the willingness to respond to deviations by an individual or group of countries from the rules of the treaty.
capital flows, spillovers, environmental agreements
The lifecycle of regions
David B Audretsch, Oliver Falck, Maryann P. Feldman, Stephan Heblich 29 April 2008
Economic geography models suggest various relationships between innovation and spatial concentration, from benefits of diversity in cities to agglomeration gains in specialised industrial parks. This column summarises empirical research that uses these theories to explain various stages of “regional lifecycles.” An important result is that supra-national EU policymakers are poorly positioned to address regions’ differing needs.
The European Union spends a substantial fraction of its budget on regional policy with the goal of reducing inequality, particularly for those European regions hardest hit by unemployment and structural change. Designing regional policy, however, is not a simple matter. Regions vary widely and there is no comprehensive theoretical framework to guide policymakers toward the single policy or set of policies appropriate for each region. Differences between regions are complex, encompassing variation in physical endowments, population density, and industrial concentration, to name just a few.
Europe's nations and regions Productivity and Innovation
spillovers, regional policy, cities