1 global imbalances and the adjustment mechanism heiner flassbeck director division on globalization...

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Global imbalances and the adjustment mechanism

HEINER FLASSBECK Director

Division on Globalization and Development Strategies

2

PER CAPITA GDP GROWTH BY REGION AND ECONOMIC GROUP, 1981-2007

(Per cent)

-5

0

5

10

1981-1989 1990-2002 2003-2007WorldDeveloped EconomiesEconomies in transitionDeveloping Economies

-5

0

5

10

1981-1989 1990-2002 2003-2007AfricaAmericaWest AsiaEast and South Asia

Developing Economies

3

Is the international adjustment mechanism working? Is the RER relevant? What are the sources of divergence?

Size (2006): US, -6.6%GDP, $870 bl,

China: +10%GDP $240 bl, Japan: +4%GDP $170 bl.

pattern: large surplus economies -> recurrent depreciations

Japan, Germany, Switzerland and Malaysia

deficit economies -> recurrent appreciationsEuro area, Hungary, New Zealand UK, Australia, Turkey, India, South Africa.

WIDENING OF THE GLOBAL IMBALANCESSize and pattern

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CARRY TRADE: a “species” of a broader “genus”•A source of imbalance for some economies.

•An amplifying factor in the divergent pattern of global imbalances.

DESTABILIZING SPECULATION

•Interest rate differentials and relatively stable currencies induce short terms speculation as in the pre-90s crisis scenario.•Floating exchange rates can move in the wrong direction

Market price determination in the international capital markets

"False pricing" in the international product markets

Widening of the imbalances and worldwide financial fragility

5

Uncovered interest returnNominal exchange-rate changeInterest rate differential

YEN-CARRY TRADE ON THE ICELANDIC KRONA, US DOLLAR AND BRAZILIAN REAL, 2005-2007

Krona

-10-8-6-4-202468

1012

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Per

cen

t

Dollar

-10-8-6-4-202468

1012

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Per

cen

t

Real

-10-8-6-4-202468

1012

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Per

cen

t

Note: A positive change in the exchange rate means an appreciation of the corresponding currency vis-à-vis the yen.

6

YEN-CARRY TRADE ON THE ICELANDIC KRONA, US DOLLAR AND TURKEY LIRA, 2005-2007

Krona

-10-8-6-4-202468

1012

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Per

cen

t

Dollar

-10-8-6-4-202468

1012

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Per

cen

t

Turkey New Lira

-10-8-6-4-202468

1012

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Per

cen

t

Hungarian Forint

-10-8-6-4-202468

1012

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Per

cen

t

7

UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE

DIFFERENTIALS, 1996-2006

LATIN AMERICALatin America

-10

-8

-6

-4

-2

0

2

4

6

8

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M360

70

80

90

100

110

120

130

140

Real exchange-rate changeInflation rate differentialReal exchange-rate trend (right scale)

Latin America

-10

-5

0

5

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3

Uncovered interest returnInterest rate differentialNominal exchange-rate changeInterest rate differentials induced by anti-inflation monetary

policies

drive nominal appreciations + inflation differentials = real appreciations

undermining international competitiveness in exchange rate

sensitive exports.

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SUB-SAHARAN AFRICASub-Saharan Africa

-10

-5

0

5

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M360

70

80

90

100

110

120

130

140


Sub-Saharan Africa

-10

-5

0

5

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3Uncovered interest returnInterest rate differentialNominal exchange-rate change

Speculation opportunities are fading and appreciation trend leveled off, but volatility

persist

9



EASTERN EUROPEEastern-European Countries

-10

-5

0

5

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M30

20

40

60

80

100

120

140

160

180

200


Eastern European Countries

-10

-8

-6

-4

-2

0

2

4

6

8

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3

Uncovered interest returnInterest rate differentialNominal exchange-rate change

Speculation opportunities, appreciation trend and volatility persist despite the reduction in interest

rates.

10



ASIAAsia

-10

-8

-6

-4

-2

0

2

4

6

8

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M360

70

80

90

100

110

120

130

140


Asia

-10

-5

0

5

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3


Little speculation opportunities, moderate average appreciation and volatility.

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REAL COSTS: EXCHANGE-RATE VOLATILITY AND REAL INTEREST RATE DIFFERENTIALS, 1995-2006 (per cent)

Asia

y = 0.8253x + 0.0766-5

0

5

10

15

-5 0 5 10 15

Real exchange-rate appreciation

Unc

over

ed in

tere

st ra

te

Latin America

y = 0.9588x + 2.7056-5

0

5

10

15

-5 0 5 10 15


Unc

over

ed in

tere

st ra

te

Sub-Saharan Africa

y = 1.0552x + 1.3406-5

0

5

10

15

-5 0 5 10 15


Unc

over

ed in

tere

st ra

te

Eastern-European countries

y = 0.6289x + 2.6447-5

0

5

10

15

-5 0 5 10 15


Unc

over

ed in

tere

st ra

te

Real exchange rate changes and uncovered interest returns in selected economies , 1995-2006 (per cent)

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DOMESTIC POLICIES, OPEN CAPITAL MARKET AND EXCHANGE RATE MANAGEMENT:

BEYOND STANDARD TRILEMMASNational policies to prevent speculation and overvaluation: •Explore non-monetary anti-inflationary policies and resilience to depreciation•Temporary measures to prevent speculative flows

while moving towards structurally lower interest rates differentials

Globally coordinated policies to reduce global imbalances:•Floating and unilateral hard pegs "no panacea"

Intermediate or regional cooperative schemes •Code of conduct •Multilateral oversight and negotiations•Identification of the size of the deviation and

enforcement of the necessary correction by a multilateral body

Multilateral monetary system as necessary as the multilateral trading system

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BRAZIL

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 200740

60

80

100

120

140

160


-20

-15

-10

-5

0

5

10

15

20

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


14



TURKEY

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 200720

40

60

80

100

120

140

160

180


-20

-15

-10

-5

0

5

10

15

20

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


15



MEXICO

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 200760

70

80

90

100

110

120

130

140


-20

-15

-10

-5

0

5

10

15

20

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


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CHINA

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 200760

70

80

90

100

110

120

130

140


-20

-15

-10

-5

0

5

10

15

20

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


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Asia: China, Hong Kong (China), India, Indonesia, Rep. Korea, Malaysia, Pakistan, Philippines, Singapore, Taiwan (Province of China) and Thailand.

Latin America: Argentina, Bolivia, Brazil, Colombia, Dominica, Mexico, Uruguay and Venezuela.

Eastern European Countries: Czech Republic, Hungary, Lithuania, Poland, Russian Federation and Bulgaria.

Sub-Saharan Africa: Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Kenya, Mali, Mauritius, Niger, Senegal and South Africa.

SELECTED ECONOMIES PER REGION

1 global imbalances and the adjustment mechanism heiner flassbeck director division on globalization...

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