International finance

Michael Dooley, Peter Garber, David Folkerts-Landau, 12 May 2022

Recent sanctions imposed by the US on Russia have called into question the US dollar’s dominant role as a reserve currency. This column argues that sanctions will, in fact, reinforce the dollar’s dominance rather than weakening it. It emphasises the importance of ‘collateral’ demand for reserves, especially by developing countries. Countries which choose to exit the dollar bloc will have restricted ability to reassure foreign investors, which could impact a growth strategy that involves participation of centre country capital.

Jean-Charles Bricongne, Rémy Lecat, 11 April 2022

Despite the large capital outflows during the Covid-19 crisis, emerging economies did not make extensive use of capital controls. Indeed, these have had limited effects on capital outflows, being more effective on inflows. This column shows that macroprudential measures on the financial sector, which are increasingly part of the policy mix, have a positive impact on outflows when applied in the origin country and a negative impact on inflows when applied in the destination country. Cooperation between origin and destination countries, both on capital controls and macroprudential measures, has more than additive effects.

Sebastian Horn, Carmen Reinhart, Christoph Trebesch, 08 April 2022

China and Russia have built close financial ties over the past ten years, with Russia becoming the largest recipient of Belt and Road lending. Given the sums at stake, the war in Ukraine is putting China’s overseas lending portfolio at higher risk than ever before. This column argues that this is likely to make Chinese state-owned banks more cautious in extending fresh international loans and in rolling over old ones. Because China is a common lender to many developing countries, they now face the added risk of a ‘sudden stop’ in foreign lending. 

Anton Korinek, Prakash Loungani, Jonathan D. Ostry, 08 April 2022

The large capital outflows from China since the onset of the war in Ukraine serve as a reminder of the volatility of capital flows. This column argues that the IMF’s recent acceptance of the occasional need for pre-emptive use of capital controls to increase resilience against volatile capital flows continues the welcome evolution of the international financial institution’s policies. The framework should continue to evolve to provide countries with policy space when capital flows impinge on domestic objectives (e.g. reducing inequality) or generate international spillovers.

Markus K Brunnermeier, Harold James, Jean-Pierre Landau, 05 April 2022

The freezing of Russian foreign exchange reserves will have long-term and systemic consequences. This column argues, however, that the dominant role of the dollar as a reserve currency will be unaffected. No other country can provide the world with a large, liquid government bond market and a fully open capital account. Sanctions may have significant long-term effects on the demand for reserves. Countries may reduce their dependence on reserves by limiting their exposure to financial shocks and partially restricting capital movements. The international monetary system may evolve towards to a new architecture, where cross-border financial integration is reduced.

Other Recent Articles:

Events

CEPR Policy Research