chapter 5 forex - jean pisani-ferry · source: adapted from tille (2005) exchange rate concepts and...
TRANSCRIPT
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pisani-ferry november 20111
Chapter 5International financial integration
and foreign-exchange policy
Introduction
• Regime choice rather than policy decisions• Major choice
– Currency convertibility (China)– Taxation of capital inflows (Brazil)– Fixed or floating exchange rates (CEECs)– Devaluation (Latvia)– Joining/leaving monetary union (EU countries)
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Outline3.1 Issues
• The balance of payments and the savings-investment balance• Currency convertibility and exchange rate regimes• Stocks and flows• A brief history of international monetary arrangements• Exchange rates concepts and measurements3.2 Theories
• Equilibrium exchange rates 1: price equalisation• Equilibrium exchange rates 2: external flow equilibrium• Equilibrium exchange rates 3: portfolio balance• Long term equilibrium and the current exchange rate• Currency crises3.3 Policies
• Financial openness• Choosing an exchange rate regime• Managing floating exchange rate
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3.1 Issues
• The balance of payments and the savings-investment balance• Currency convertibility and exchange rate regimes• Stocks and flows• A brief history of international monetary arrangements• Exchange rates concepts and measurements3.2 Theories
• Equilibrium exchange rates 1: price equalisation• Equilibrium exchange rates 2: external flow equilibrium• Equilibrium exchange rates 3: portfolio balance• Long term equilibrium and the current exchange rate• Currency crises3.3 Policies
• Financial openness• Choosing an exchange rate regime• Managing floating exchange rate
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The balance of payments
• Note that the balance of payments records flows between residents and non-residents
A) Merchandises (X, M)
X - M = TB (trade balance)
B) Services and factors income balance
• Services (tourism, transport, royalties...) • Income (interest, expatriates’ wages)
TB + Services and factors balance = balance on goods and services = GSB
C) Unilateral transfers s (U)
• Grants, financing of international organisations
GSB + U = B (current account balance)
• Note that the sum of foreign income and transfers corresponds to the difference between GDP and GNP
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The capital account and the financialaccount
A) The capital account (balance BK)
• Capital transfers (e.g. debt foregiveness)
B) The financial account (balance BΦ)
BΦ = credits (capital inflows) – debits (outflows)
• FDI (threshold for control is a share above 10%) • Portfolio investments (no control)• Trade credits and financial credits• Operations on derivatives• Change in FX reserves (∆R)
Important accounting identity: B + BK + BΦΦΦΦ = 0
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US and euro area balances of payment, 2008
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UNITED STATES EURO AREAEURO AREA
$Bn % GDP €Bn % GDP
Current account and transfers -673.3 -4.7% -67.3 0.7%
Goods and services -681.1 47.0
Factor income 127.6 -22.0
Transfers -119.7 --92.3
Capital account -2.6 -0.0% 13.7 0.1%
Financial account* 546.6 3.8% 212.6 2.3%
Direct investments 7.4 409.2
Portfolio investments 154.4 235.7
Financial derivatives -373,9 -12.3
Other investments 342.2 102.1
Foreign exchange reserves 416,5 -4.9
Statistical discrepancies 129.3 0.9% -151.1 -1.6%
Source: European Central Bank and US Bureau of Economic Analysis
Internal and external equilibrium
• There is an accounting link between the current account balance (external equilibrium) and the savings-investment balance (internalequilirium). To see why start from goods market equilibrium
Y + M = C + I + G + XWhere Y is GDP
• The national income or GNP is:R = Y + U + i*F –iO* = [C + I + G] + [X - M + U + i*F – i O*]
Where:• U are unilateral transfers received• F is the foreign currency wealth of the residents• O* is the domestic currency wealth of the non-residents
The first term on the right-hand side is domestic absorptionThe second term is the current account balance
• Hence the current account balance is the difference betweenincome and domestic absorption
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The current account and the savings-investment balance
• Now start again from:
Y + U + i*F –iO* = [C + I + G] + [X - M + U + i*F – i O*]
• The equation can be rewritten:
[(Y + U + i*F - iO* - T - C) - IP] + [T – G - IG] = B
Where T represents taxes, IP private investment and IG government investment.
• The first term on the left-hand side is the difference between private savingand private investment, the second the difference between governmentsaving and government investment. Hence,
B = SP + SG – I
Where Sp is private saving and SG government saving.• The current account balance equals the difference between domestic saving
and domestic investment.
• In an open economy, investment can be financed by foreign saving – and this implies a current account deficit
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The US case
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-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
19
70
-I
19
71
-II
19
72
-III
19
73
-IV
19
75
-I
19
76
-II
19
77
-III
19
78
-IV
19
80
-I
19
81
-II
19
82
-III
19
83
-IV
19
85
-I
19
86
-II
19
87
-III
19
88
-IV
19
90
-I
19
91
-II
19
92
-III
19
93
-IV
19
95
-I
19
96
-II
19
97
-III
19
98
-IV
20
00
-I
20
01
-II
20
02
-III
20
03
-IV
20
05
-I
20
06
-II
20
07
-III
20
08
-IV
Pe
rce
nta
ge
of
GD
P
Gross Saving in Investment in the US, 1970-2009
Household saving Corporate saving Government saving
Investment (inverted) Statistical adjustment Net foreign lending
Source: NIPA
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Convertibility and exchange rate regimes
• Convertibility – Current-account convertibility– Financial-account convertibility
• Exchange-rate regimes– Floating– Fixed– (in reality a whole range of regimes)
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De jure financial openness, 1970-2007
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Source: Chinn and Ito (2008)
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The balance of payments and exchange-rate regimes
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Net financial inflows
∆Fin - ∆out
> 0
Financial outflows
∆Fout
Financial inflows ∆F
in
Exports X
Imports M
Current account balance B = X-M < 0
Fall in foreign exchange reserve
∆R < 0
Exports X
Financial inflows ∆F
in
Decrease in foreign exchange reserves
∆R < 0
Imports M
Financial outflows ∆F
out
B + net financial
inflows (∆Fin -
∆Fout
) < 0
Floating exchange rate system
Fixed exchange rate system
A variety of exchange-rate regimes
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Highflexibility
‘Dollarization’,‘euroization’
Monetaryunion
Soft peg with fluctuationband
Fixed exchangerate
Currencyboard
Crawlingpeg
Managedfloat
Free floatLowflexibility
Intermediate regimesHard pegs
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Official exchange-rate regimes, 2008
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Exchange rate regime
Number of countries Countries
No separate legal tender 41
27 US dollarization Ecuador, El Salvador, Marshall Islands, Micronesia, Palau, Panama.
13 euroization Montenegro, San Marino, Timor-Leste.
1 Australian dollarization Kiribati
Monetary union 35
15 Euro area
Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Spain. Floating exchange rate against the rest of the world.
8 WAEMUa Benin, Burkina-Faso, Côte d’Ivoire, Guinea Bissau, Mali, Niger,
Senegal, Togo. Fixed exchange rate against the euro.
6 CAEMCb Cameroun, Central African Rep., Chad, Rep. of Congo, Equatorial
Guinea, Gabon, Fixed exchange rate against the euro.
6 ECCUc Antigua and Barbuda, Dominica, Grenada, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines. Currency board against the US dollar.
Currency board: 7
4 against the euro Bosnia and Herzegovina, Bulgaria, Estonia, Lithuania
2 against the US dollar Djibouti, Hong Kong S.A.R.
1 against the Singapore dollar Brunei Darussalam
Conventional fixed pegs: 54
6 against the euro Cape Verde, Comoros, Croatia, Denmark, Latvia, FYR of Macedonia
36 against the US dollar Angola, Argentina, Aruba, Bahamas, Bahrain, Bangladesh, Barbados, Belarus, Belize, Eritrea, Guyana, Honduras, Jordan, Kazakhstan, Lebanon, Malawi, Maldives, Mongolia, Netherlands Antilles, Oman, Qatar, Rwanda, Saudi Arabia, Seychelles, Solomon Is., Sri Lanka, Suriname, Syria, Tajikistan, Trinidad and Tobago, Turkmenistan, United Arab Emirates, Venezuela, Vietnam, Yemen, Zimbabwe
3 against the South African rand
Lesotho, Namibia, Swaziland
2 against the Indian rupee
Bhutan, Nepal
7 against a basket Libya, Fiji, Kuwait, Morocco, Russian Fed., Samoa, Tunisia
Pegged rates with a horizontal band: 6
1 against the euro , Slovak Republic
2 against the US dollar Syria, Tonga
Crawling pegs: 5
7 against the US dollar Bolivia, China, Costa Rica, Ethiopia, Iraq, Nicaragua, Uzbekistan
3 against a basket Azerbaijan, Botswana, Iran
Managed floating: 44
8 Against the US dollar Cambodia, Kyrgyz Rep., Lao P.D.R., Liberia, Mauritania, Mauritius, Myanmar, Ukraine
3 against a basket Algeria, Singapore, Vanuatu
33 undefined
Independently floating: 26
Albania, Australia, Brazil, Canada, Chile, Dem. Rep. of Congo, Czech Rep., Euro area, Hungary, Iceland, Israel, Japan, Rep. of Korea, Mexico, New Zealand, Norway, Philippines, Poland, South Africa, Somalia, Sweden, Switzerland, Turkey, United Kingdom, United States, Zambia
Source: IMF
De facto exchange rate regimes: fear of floating?
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Source: Ilzetzki, Reinhart and Rogoff (2008) based on IMF data
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Stocks and flows
Financial convertibility results in accumulation of financial stocks• BOP records flows• But stocks (foreign assets and liabilities) matter too • Net stocks depend on net flows, i.e. current account
balances (stock/flow dynamics) • Gross stocks depend on gross flows (capital inflows and
outflows)
Why they matter:
• Net stock: Net Foreign Asset position is the external wealth/debt of a nation Generates income if positive (rentier behaviour), involves cost if negative. Sustainability issue
• Gross stock: exposure to market risk (currency risk; interest rate risk)
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Net flows 1996-2010
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In the 2000s net flows have mostly been South-North
-3
-2
-1
0
1
2
3
4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Global Imbalances(percent of world GDP)
US JPN Eur surplus CHN EMA OIL ROW Eur deficit Discrepancy
Source: Blanchard and Milesi-Ferretti (2010)
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Net stocks: NFA positions, 1970-2008
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Source: Lane and Milesi-Ferretti (2006) from 1970 to 1996, and IMF, World Economic Outlook, October 2008, from 1997 to 2008.
Assets and liabilities are measured at estimated market value
Gross flows 1998-2008
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In the 2000s the rise in gross flows mainly involved advanced countries
Source: Milesi-Ferretti (2009)
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Gross stocks are mainly held by advanced countries
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World distribution of external assets and
liabilities, 2007
G7
Other advanced
non-G7 G20
Others
Source: Authors calculations with Lane and Milesi-Ferretti data
Wealth dynamics
• Net Foreign Assets (NFA) = External Assets minus Liabilities
W = F – O*
• Value changes because of:– Current account surpluses / deficits– Valuation changes:
• Market valuations• Exchange rates
• If they were no valuation changes, one could writeW - W-1 = B
• If PB is the primary balance, PB = B - i*F – iO*= X – M
• Then:W - W-1 = B = BP + i*F - iO*
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Valuation matters
Assets Liabilities Balance
Total 10 12.5 - 2.5
… dollar-denominated 3.5 11.9 - 8.4
…other currencies and gold 6.5 0.6 +5.9
Effects of a 10% dollar
exchange rate decline+0.65 +0.06 +0.59
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Example: US end 2004 (dollar trillions)
Source: adapted from Tille (2005)
Exchange rate concepts and measurements
• Nominal exchange rate E• Real exchange rate Q = EP/P*
– where P = Π(Pi)αi, P* = Π(P*i)α*i, Σαi= Σα*i=1
• Effective exchange rate – Average of exchange rates, generally weighted by trade shares
– There are nominal and real effective exchange rates
– Many alternatives measures of effective exchange rates
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Nominal and real effective exchange rates of the euro
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Source: ECB
There is more than one effective real exchange rate
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E ffec tive E x c hang e R ates of the € (1999Q1=100)
80
85
90
95
100
105
110
115
120
1999Q1
1999Q3
2000Q1
2000Q3
2001Q1
2001Q
3
2002Q
1
2002Q
3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q
1
2006Q
3
2007Q
1
2007Q
3
NEER
REER C PI
REER GDP Deflator
REER Produc er Pric es
REER UL C
Manufac turing
REER UL C Total
Ec onomy
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Real exchange rate within a monetary union may diverge
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R eal E ffec tive E xc hang e R ates in E urope (2000=100)
80
90
100
110
120
130
140
A us tria
Belg ium
Denmark
F inland
Franc e
G ermany
G reec e
Ireland
Italy
L uxemburg
Netherlands
Portugal
S pain
S w eden
UK
EA 12
EU 15
3.1 Issues
• The balance of payments and the savings-investment balance• Currency convertibility and exchange rate regimes• Stocks and flows• A brief history of international monetary arrangements• Exchange rates concepts and measurements3.2 Theories
• Equilibrium exchange rates 1: price equalisation• Equilibrium exchange rates 2: external flow equilibrium• Equilibrium exchange rates 3: portfolio balance• Long term equilibrium and the current exchange rate• Currency crises3.3 Policies
• Financial openness• Choosing an exchange rate regime• Managing floating exchange rate
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Equilibrium exchange rates 1: Price equalisation
• Purchasing Power Parity (PPP) introduced by Cassel in the 1920s
• Two versions– Absolute Q = 1– Relative Q = cste
• PPP amounts to saying that the internal and external purchasing power of a currency are the same (or evolve in tandem)
• ‘The international neutrality of money’• PPP only holds (a) in the long run or (b) in situations of
high inflation• Even so many deviations from PPP
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PPP: short term and long term
Source : Taylor and Taylor 2004
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The PPP and hyperinflation
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External and internal value of the Brazilian real, 1991-94
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The PPP performs poorly in situations of moderate inflation
Taux de change nominal et réel du dollar contre
grandes monnaies, 1973-2004
50
60
70
80
90
100
110
120
130
140
150
1973
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1997
1999
2001
2003
source : Fed de New-York
Nominal
Réel
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Development levels and deviations from PPP
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PPP GDP per capita and real exchange rates in 2006
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euro area price level = 1
0.00.10.20.30.40.50.60.70.80.91.01.11.21.31.41.5
eu15
euro IE
F
I LU
F
R
NL
DE
A
T
BE
IT
E
S
GR
P
T
DK
S
E
UK
CY
M
T
SI
HU
E
E
CZ
S
K
PL
LV
LT
HR
T
K
RO
B
G
1995
2005
Price dispersion: also in Europe
Source B. Egert (2006)
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The Balassa-Samuelson effect
• Applies to developing economies• 1 factor (labour), mobile across sectors, and 2 sectors
– Tradables sector T (weight α) : industry• PPP for tradables : EPT = PT* • Productivity much lower than in advanced countries πT << πT*
– Nontradables sector N (weight 1 - α) : services• Mobility implies wages is the same as in T : WN = WT
• No technical progress so productivity as in advanced countries πN = πN*
– Perfect competition implies zero profits• Hence,
– Wage is lower in developing country EW << W*– Service prices are lower EPT << PT*– PPP does not hold
E[PE αPN 1-α] << [PE* αPN* 1-α]
Consequences
• Development leadsto real exchange rate appreciation
• True in Central and Eastern Europe
Source: DGTPE/Eurostat
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But B-S does not seem to apply to China
Source: Cheung, Chinn and Fujii 2007
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The use of PPP for measurementpurposes
PIB Revenu par tête
en dollars
courants
en dollars de
PPA
en dollars
courants
en dollars de PPA
USA 12168 11693 41440 39820
Japon 4734 3809 37050 29810
Allemagne 2532 2324 30690 28170
Royaume-Uni 2013 1882 33630 31430
Chine 1938 7634 1500 5890
France 1884 1779 30370 29460
Inde 673 3369 440 1970
Brésil 551 1460 3000 7940
Russie 488 1392 3400 9680
Source : Banque mondiale
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Equilbrium exchange rate 2:External flow equilibrium
• Under Bretton Woods the IMF developed techniques to assessexchange rate policies and diagnose exchange rate misalignments
• Under floating John Williamson (1983) revives thesetechniques and proposes to define a FundamentalEquilibrium Exchange Rate (FEER)
• The basic idea is that the equilibrium exchange rate corresponds to a situation where the country achieves bothinternal and external balance
• It is therefore a normative, general equilibrium concept
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FEERs in a nutshell
• Macroeconomicapproach: – Internal and external
equilibrium– Internal: equilibrium
unemployment (NAIRU)– External : net structural
capital outflow (inflow)• This determines the
Fundamental EquilibriumExchange rate Qe
GDP
Q
Internal balance
External
balance
Qe
Ye
Inflation + deficit
Unemployment + deficit
Unemployment
+ surplus
Inflation + surplus
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Internal equilibrium
• Elementary– Vertical supply curve
• A little more subtle– The internal balance depends on the exchange rate since:
– For a given purchasing power of wages W/Pc, the real wage is a decreasing function of the real exchange rate
– Hence a depreciation reduces aggregate supply
ω
ω
ω
−
−
=
==
QP
W
P
W
E
PPP
P
P
P
W
P
W
c
cc
c
*où 1
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External equilibrium
+ + + -Since M = M(Y, Q) et X = X(Y*, Q),
- + -TB = TB(Y, Y*, Q)
where TB is the trade balance
• The trade balance writes:
B = B (Y, Y*, Q)
• Given exogenous structural capital flows (ex FDI) this imples
• Macroeconomic policy is supposed to take care of the internalequilibrium, hence :
FAB =
FAQYYBFEER =)*,,(
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FEER-based estimates of RMB undervaluation
Période d’étude Cibles de compte courant chinois (en % du PIB)
Sous-évaluation vis-à-vis du dollar US
Coudert et Couharde (2005)
2002/2003 -1,5% -54%
Coudert et Couharde (2005)
2002/2003 -2,8% -44%
Goldstein (2004) 2003 -1% de -15 à -30%
Jeong et Mazier (2003) 2000 -1,5% -60%
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Volumes, values and the J curve
• Whereas trade and current account balances at constant prices respond positively to exchange rate depreciation, the response of current price balances is ambiguous
• Constant prices trade balance:TB = X(Y*, Q) - M(Y, Q)
• Current prices trade balance:TBV = PX - P*M/ETBV = P(X - M/Q)
• It can be shown (see Appendix) that the current pricesbalance only responds positively if the sum of price elasticitiesof exports and imports exceeds one
• This is true only in the medium term, hence the ‘J-curve’response of the trade/current account balance
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Empirical alternatives to the FEER
• Unlike PPP, the FEER approach encompasses the macroeconomicequilibrium
• But it is normative in essence (not adequate for positive purposes, e.g. forecasting)
• And it rests on disputable assumptions– Especially ad-hoc current account norms
• Clark and MacDonald (1998) build on the FEER but introducemore degrees of freedom
• They rely on equilibrium exchange rate theories to choose the long-run determinants of the exchange rate, without setting norms
• Result: BEER (Behavioural Equilibrium Exchange Rate) • Stein (1994) also defines the NatREx (Natural Real Exchange Rate
which is a variante of the BEER
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The BEER• Start from estimation of:
qt = βHt + τTt + εt
• Where q is the (log of the) exchange, rate H represents itslong-term determinants (Net Foreign Asset Position, relative productivity) and T temporary factors (e.g. interestrate differentials)
• Eliminating transitory factors gives the equilibriumexchange rate :
st = βHt
• Unlike for the FEER approach there is no predeterminednorm
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Example: Clark-MacDonald 1998
Estimated equilibrium
exchange rate
Market exchange rate
Overvaluation at t
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Equilibrium exchange rates 3: Portfolio model
• Assumptions behind uncovered interest rate parity:– Asset allocation is entirely determined by relative returns– Investors are indifferent between euro and dollar assets, if
they expect the same return on both• Realistic?
– Is accumulation of dollar-denominated assets somethinginvestors are indifferent to?
– For a euro area resident, is can the exchange rate riskinvolved in holding dollar-denominated assets beneglected?
– Are assets so perfectly substitutable?• Leads to portfolio choice model
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Investors’ behaviour
• Investors typically distribute investments across:– instruments (cash, bonds, stocks..)– risk classes (from AAA to junk assets)– maturities– currencies
• Expected returns differ across instruments, risk classes, etc..
• The higher the return, the more the investor is willing to take risk (Tobin, 1958)
• The share of risky assets (e.g. stocks) in the portfolio therefore depends on relative returns
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Example: benchmark allocations
Source: The Economist
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Risk and return (for US assets, 1926-1994)
Average return
(%)
Standard
deviation (%)
Stocks small companies 12.2 34.6
Stocks large companies 10.2 20.3
Corporate bonds 5.4 8.4
Government bonds 3.7 3.3
Source : Burton Malkiel
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Basic ideas
• Allocation decisions are made for stocks :– An household’s total financial wealth– A companies’s total debt– An institutional investor’s total portfolio
• The investor allocates its portfolio by asset classes and then individual classes:– Portfolio diversification in search of risk/return combination
• Flows (e.g. net purchase of govt bonds) are derivedfrom stock allocation.– Difference between current stock and desired stock for t + 1
This is the portfolio choice model
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Example: bond yields, maturitiesand risk
Aaa
/AA
A
Aa1
/AA
+
Aa2
/AA
Aa3
/AA
-
A1
/A+
A2
/A
A3
/A-
Baa1
/BB
B+
Baa2
/BB
B
Baa
3/B
BB
-
Ba1
/BB
+
Ba2
/BB
Ba3
/BB
-
B1
/B+
B2
/B
B3
/B-
Caa/
CC
C1 an
3 ans5 ans
10 ans 30 ans
0
200
400
600
800
1000
Spreads corporate, 1/03/04
1 an
3 ans
5 ans
10 ans
30 ans
pisani-ferry november 2011 54
Risk and decision
• How to represent behaviour in riskyenviromnent
Hypotheses:• Utility increases with income but decreasingmarginal utility of income– U’(Y) > 0, U’’(Y) < 0
• Agent can either– Play and gain x with probability p [p = ½] and ywith probability (1 – p)
– Do not play and receive (x + y) / 2• Will she play? • Depends on attitude towards risk
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Utility and income
• If the agent does not playher utility is: U[½(x + y)] - point A
• If she plays it is : ½[U(x) + U(y)] - point B
• U(A) > U(B), so it ispreferable not to play
• This is risk aversion
• Agent will prefer lower, but more certain income
• Would be the opposite withconvex utility (e.g. profit) Income
Utility
A
B
x y
U(y)
U(x)
(x+y)/2
pisani-ferry november 2011 56
Measuring risk aversion
• Reason for risk aversion: utility is concave, i.e. U’’(W) < 0– Intuitively, risk aversion grows with concavity of utility function i.e.
with |U’’(W)|– But U’’ is not invariant to changes in measure of utility.
• Normalised measurement:• Absolute aversion:
• Relative aversion
)('
)('' )(
WU
WUW −=Φ
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pisani-ferry november 2011 57
A basic two-assets portfolio
• Initial wealth W0, two assets yielding i, i*• Assets characterised by variance (σi, σi*) and covariance • If x is the share of the (*) asset in the portfolio,
W= W0 [(1-x) (1 + i) + x (1 +i*)]
E[W] = W0 (1 + (1 - x) E[i] + x E[i*])
σ2W =W0
2[(1 - x)2σi2 + x2 σi*
2 +2x(1 - x) σii*]
• Assume utility depends on expected wealth, variance
U = U[E(W), σ2W/2]
pisani-ferry november 2011 58
A basic two-assets portfolio (2)
Maximising U yields:
[ ] ( )[ ]
*
2
*
22
2
*
2
2
0
*
2
*
2
*
22
00
2
2 avec )(*)(
'
'~
:*asset of share optimal giveswhich
0)2(')(*)('
0''
iiiiiiiW
iiiiiiiW
W
SSS
iEiE
UW
Ux
xWUiEiEWUdx
dU
dx
dU
dx
dWU
dx
dU
σσσσσ
σσσσσ
σ
σ
σ
σ
−+=−
+−
−=
=+−−++−=
=+=
16/11/2011
30
A basic two-assets portfolio (3)
• Equivalently:
• ψ measures risk aversion
• Portfolio has two components:– Minimum variance portfolio xM (independent from returns)
– Spéculative component xS (depends on returns)
• Optimal equalises marginal utility of return and marginal cost of risk
• If the first asset is risk-free, minimum variance portfolio does not include the otherone
• There is therefore a risk premium for holding the risky asset. It increases with the share of this asset in the total porfolio.
pisani-ferry november 2011 59
'
'- where W
'
'W- with
)*( ~
00
22
*
2
WW
iii
U
U
U
U
S
iiE
Sx
σσ ψψθ
θ
σσ
===
−+
−=
xSiiE ~*)(2θ+=
What are equilibrium exchange rates for?
pisani-ferry november 2011 60
16/11/2011
31
Long-term equilibrium and the current
exchange rate
• Simple uncovered interest parity condition under strict
hypotheses
– Perfect mobility
– Asset substitutability
– No risk aversion
• UIP widely used for simplicity (in spite of shortcomings) in
theoretical and empirical models, but does not fit facts well
• Implication in floating rate context (s = se + i – i*) : exchange
rate ‘jumps’ in response to news about future policies:
pisani-ferry octobre 2011 61
eS
iSi
*)1()1(
+=+ esii &−= *
( )∑
−
=
+++ −+=1
0
*T
e
tt
e
Ttt iissτ
ττ
implies
Exchange rate adjustment when prices are sticky: the Dornbusch overshooting model
• Influential model of 1976• Combination of long-run monetary model with money neutrality
and flexible prices and short-run keynesian model with sticky prices
• Results in overreaction of exchange rate to changes in money supply (overshooting)
• Explains high exchange rate volatility
pisani-ferry november 2011 62
16/11/2011
32
Key dynamics
pisani-ferry octobre 2011 63
time
Exchange rate
Interest rate
Price level
Money supply
Overshooting
pisani-ferry octobre 2011 64
0 (7)
* )6(
* )5(
)]()( (4)
)( )3(
* )2(
)1(
yy
p-peq
ppe
ppqqp
eee
eii
iypm
a
a
=
+=
−=
−+−=
−=
=−
−=−
µγ
θ
βα
&
&
&
The model
Log-linearised
stands for the long term value of XX
16/11/2011
33
pisani-ferry octobre 2011 65
Solving the model
• Start from long-term stationary equilibrium
(Where )
• Consider permanent shock to money supply and examine:
– New long term equilibrium
– Dynamics
• p is a state variable that moves continuously.
• The exchange rate can ‘jump’ (no rigidity on asset pricemarkets)
0== ep &&
pisani-ferry octobre 2011 66
0 )'7(
0 )'6(),'5(
0* )'2(
)'1(
yy
q
ii
iypm
=
=
=−
−=− βα
Long term solution
• Assume , the model simplifies:
• A monetary shock translates into a proportionate increase in the price level
• Money is neutral in the long run
xx =
0==
−=
=
qdyd
mded
mdpd
16/11/2011
34
pisani-ferry octobre 2011 67
Dynamics
• The model can be rewritten in difference with the steady
state solution. (1), (2), (3), (7) lead to:
• Substraction from (1’) gives
• This equation represents the money market equilibrium
)(* )8( 0 eeiypm −+−=− βθβα
)( )( eeppAA −=− βθ
pisani-ferry octobre 2011 68
Graphical solution
AA
AA’
PP
PP’
E’’
E’
e
p
p
'p
'e''e e
E
overshooting
16/11/2011
35
pisani-ferry octobre 2011 69
The Dornbusch model: off-equilibrium
aspects
• The only stable trajectory isthe saddle path AA
• The other trajectories are divergent
PP
p
e
p
AA
pisani-ferry octobre 2011 70
Lessons from the Dornbusch model
• The model combines
– Instant adjustment of asset prices
– Goods market price rigidity
• This leads to overshooting
• Exchange rate volatility is no accident, it comes from thiscombination of internal rigidity and flexibility
• Model still includes considerable simplifications and is of limited empirical values, but captures an important link
16/11/2011
36
Currency crises
pisani-ferry november 201171
Source IMF
Crises since 1970
pisani-ferry november 2011 72
A basket case: Argentina, 8 January 2002
Taux de change du peso argentin en dollar, 2001-2003
0
0.2
0.4
0.6
0.8
1
1.2
01/0
1/20
01
01/0
3/20
01
01/0
5/20
01
01/0
7/20
01
01/0
9/20
01
01/1
1/20
01
01/0
1/20
02
01/0
3/20
02
01/0
5/20
02
01/0
7/20
02
01/0
9/20
02
01/1
1/20
02
01/0
1/20
03
16/11/2011
37
Exchange rates and reserves
pisani-ferry november 2011 73
A balance-of-payments crisis: Pakistan 2008
pisani-ferry november 2011 74
Questions
• Questions :– Why does the crisis occur (deep causes or marketirrationality)?
– When does the crisis occur? At random or at a determined moment?
– Do speculators coordinate among themeselves (and how)?
– Can / should policymakers resist speculation?
• Not a single theory, but several ‘generations’ of currency crises models– Each generation of models aims at explaining new crisischaracteristics
– Different responses to the above questions
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38
pisani-ferry november 2011 75
A generic model
• 2 speculators, 1 central bank• Each speculator can borrow up to 6 units of the national
currency at cost 1
• The central bank holds R units of reserves. Consider 3 cases:
• R = 20• R = 6• R = 10
• Fixed exchange rate E = 1. If the central bank has to giveup the fixed parity, E = 0.5 after devaluation
• If R =20 the central bank wins, if R =6 it loses, if R =10 two equilibria depending on whether the speculatorscoordinate or not.
• The $1tr question: why and how do speculators coordinate?
pisani-ferry november 2011 76
1st generation (Krugman, 1979) : Unsustainable policies
• Motivation: • Understand the ‘runs’ on reserves
• Hypothesis: • Crisis has a ‘fundamental’ origin, i.e. there policy is inconsistent with
participation in the fixed exchange rate regime. For example:• Persistent current-account deficits• Inflation • Public debt accumulation
• Prediction• Crisis occurs before reserves are exhausted, at determined moment:
when the post-crisis floating exchange rate equals the pre-crisis fixedexchange rate.
• Insight: speculateurs• The crisis is a rational response to policy incoherence
• Speculators do not act upon observing that there is incoherence but they do not wait until reserves are exhausted either
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pisani-ferry november 2011 77
How the model works
• Reserves declinegradually untilthe crisis
• Shadowexchange rate evolves smoothly
• The crisis occurswhen the gain from speculationis nil
Forex reserves
Exchange rate
time
Underlying shadow exchange rate
pisani-ferry november 2011 78
Implications and limits
• Applies to all unsustainable policies• Policy implications:
– As markets are rational, governments should• Avoid trying to keep defend exchange rate if there is underlyinginconsistency
• Resist the crisis if fundamentals are ‘good’
– Post crisis, case for IMF programmes (conditional financialassistance)
• Limits: model does not explain
− Attacks on currencies with ‘strong’ fundamentals
− Contagion
• Representation of government behaviour is simplistic (thoughsometimes correct)
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pisani-ferry november 2011 79
Applications
• Crises of fixed-exchange rate regimes:– Italy / Spain 1992 (but not France)– Thailand 1997 (but not Korea)– Argentina 2002 – Latvia 2008
• Debt crises involve similar mechanisms– Greece 2010
pisani-ferry november 2011 80
2° génération (Obstfeld, 1994) : Les ‘nouveaux fondamentaux’
• Motivation : comprendre les attaques contre les monnaies fortes (FF en 92-93) dont les « fondamentaux » (inflation, solde extérieur) sont bons
• Hypothèse : le gouvernement affirme vouloir maintenir les changes fixes, mais peut souhaiter dévaluer si la situation le justifie
• Principe : • les autorités arbitrent entre différents objectifs, dont le maintien
des changes fixes (coût fixe politique - perte de crédibilité - de la dévaluation);
• les spéculateurs savent qu’en dépit des dénégations, il peut être optimal de dévaluer.
• Prédiction : • Le coût économique du maintien des changes fixes
augmente lorsque les spéculateurs anticipent une dévaluation.
• La crise de change intervient à un moment déterminé, avant que les autorités décident d’une dévaluation “ à froid ”.
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41
pisani-ferry november 2011 81
Un exempleHypothèses: • le chômage suit avec 0 < ρ < 1 • la fonction de perte des autorités est L = U2 + cZ
où Z = 1 en cas de dévaluation au cours de la période, et Z = 0 sinon
• L’inflation est : – Nulle en changes fixes crédibles;– Egale à d après une dévaluation.
• Pour résoudre le modèle, on minimise la fonction de perte L• Il y a trois cas :
– Il faut maintenir la parité fixe si le chômage est faible;– Il faut dévaluer si le chômage est fort;– Si le chômage est intermédiaire, il y a deux équilibres et il faut
dévaluer si le marché anticipe une dévaluation.
εαρ +−−= − )ˆˆ(1
a
tt ppUU
pisani-ferry november 2011 82
La nouveauté de ces modèles
• En 1992, les autorités françaises ne comprenaient pas pourquoi le franc était attaqué alors que l’inflation était faible et la balance courante équilibrée
• Les modèles de 2° génération introduisent les « nouveaux fondamentaux » (chômage) : il peut y avoir des attaques rationnelles contre des monnaies fortes
• Apport : théorie « psychanalytique » de la crise (la spéculation révéle des désirs refoulés des gouvernements).
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42
pisani-ferry november 2011 83
Implications et limites
• Application : le modèle peut être étendu à tous les cas où le maintien des changes fixes peut être sous-optimal (par exemple, dette publique excessive qu’une inflation permettrait de déprécier)
• Implications de politique économique : – les clauses de sortie (option de dévaluation dans un régime de change fixe) ont un coût potentiellement élevé car elles sont prises en compte dans les anticipations des spéculateurs ;
– un durcissement de la politique économique face à une attaque spéculative peut attiser la spéculation s’il est perçu comme non soutenable.
• Limites : la crise reste rationnelle, il n’y a pas de contagion
pisani-ferry november 2011 84
Applications
• Quelques applications :– Royaume-Uni 1992 Après la crise, Norman Lamont, chancelier de l’échiquier britannique, a « chanté dans son bain »
– France 1992-93 (mais sans chansons)
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43
pisani-ferry november 2011 85
• Exemple : un gouvernement est forcé de dévaluer contre son gré parce qu’il y est forcé par la spéculation
• Principe : en raison d’équilibres multiples, le comportement des spéculateurs est in fine déterminant. La crise est auto-réalisatrice. Après la dévaluation, la politique monétaire changera éventuellement dans un sens plus expansionniste, ce qui validera ex post leur attaque..
• Prédiction : il peut y avoir des attaques auto-réalisatrices en l’absence de facteur fondamental (situations intermédiaires indéterminées).
• Apport : introduit la possibilité d’équilibres multiples, de spéculation déstabilisante, de contagion.
La spéculation auto-réalisatrice (Obstfeld, 1996)
pisani-ferry november 2011 86
La spéculation auto-réalisatrice (suite)
• Implications de politique économique : – les marchés des changes sont un facteur d’instabilité ; il faut
donc éviter les régimes de change vulnérable, notamment intermédiaires entre flottement et fixité totale ;
– en cas de régimes intermédiaires, il faut prévoir soit des mécanismes de défense collectifs (garantie d’intervention illimitée, lignes de crédit), soit des restrictions aux mouvements de capitaux ;
– les programmes FMI sont inadaptés, il faut des outils anti-contagion.
• Limites : (a) ces modèles ne disent pas comment les spéculateurs se
coordonnent entre eux pour lancer une attaque (hasard, comportement moutonnier, manipulation du marché par un (des) spéculateur(s) de grande taille ?) ;
(b) ils supposent que la politique économique change après une attaque réussie, et donc la valide ex post.
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44
pisani-ferry november 2011 87
La spéculation auto-réalisatrice (fin)
• Quelques applications :– Contagion au sein du SME– Contagion asiatique
pisani-ferry november 2011 88
3° génération : Interaction crise financière / crise de change
• Motivation : les crises asiatiques (Corée, Indonésie) où• Les fondamentaux traditionnels sont bons• Il n’y a pas de chômage• Mais la crise de change s’est accompagnée d’une crise financière
interne
• Principe : la crise de change induit l’illiquidité des agents intérieurs
• En changes fixes, les agents locaux empruntent en dollar• La dépréciation implique une appréciation de la dette libellée en dollar.• Les banques refusent de prêter et l’investissement s’effondre. • D’où une fuite des capitaux qui renforce la dépréciation.
• Prédiction : les pays dont la dette est libellée en dollars sont particulièrement vulnérables (situations intermédiaires indéterminées).
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45
pisani-ferry november 2011 89
Implications et limites
• Apport : introduit les structures financières (fondamentaux structurels) dans l’analyse des crises de change
• Limites : tous les pays ont des faiblesses structurelles
• Implications de politique économique : – l’endettement privé en devises est dangereux car peut aboutir à une crise déclenchée par des anticipations auto-réalisatrices.
– une taxe sur les entrées de capitaux (de type chilien) peut permettre de réduire la probabilité d’une telle crise
– en situation de crise, une restriction sur les sorties de capitaux peut être justifiée (cas de la Malaisie)
pisani-ferry november 2011 90
Applications
• Quelques applications :–Crise asiatique et cronycapitalism
– Islande 2008– Hongrie 2008
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pisani-ferry november 2011 91
Conclusions
• Des acquis théoriques :– les crises ne sont pas dues au hasard– il y a plus d’un type de fondamentaux– il y a de bonnes et de mauvaises crises
• …et pour la politique économique : – les réponses diffèrent – les instruments aussi
• Mais un foisonnement de modèles qui laisse perplexe
3.1 Issues
• The balance of payments and the savings-investment balance• Currency convertibility and exchange rate regimes• Stocks and flows• A brief history of international monetary arrangements• Exchange rates concepts and measurements3.2 Theories
• Equilibrium exchange rates 1: price equalisation• Equilibrium exchange rates 2: external flow equilibrium• Equilibrium exchange rates 3: portfolio balance• Currency crises3.3 Policies• Financial openness• Choosing an exchange rate regime• Managing floating exchange rate
pisani-ferry november 2011 92
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47
A brief history of international monetary arrangements
pisani-ferry november 2011 93
Period Trade regime Capital
flows
Monetary arrangements
Pre-1879 Increasingly free following
repeal of corn laws 1846
and F/UK agreement 1860
Mostly free Variety of national arrangements (gold
standard, silver standard, bimetallism,
inconvertibility)
1879-
1914
Liberal Free capital
movements
Gold standard
Interwar Increasingly protectionist No stable arrangement
1944-
1973
Increasingly liberal Capital
controls
Gold exchange standard, fixed-but-adjustable
exchange rates (Bretton Woods)
1973-
2009
Mostly liberal Gradual lifting
of capital
controls
Floating exchange rates among major
currencies, with:
• Frequent pegs to one of major currencies
• Regional arrangements
Source: based on Eichengreen (1996) and Mc Kinnon (1993)
De facto international financial integration, 1870-2009
pisani-ferry november 2011 94
Average of absolute values of current accounts to GDP ratios for major countries.
Source: Taylor (1996), updated by Bénassy-Quéré et al. (2010)
0
1
2
3
4
5
6
18
70
-74
18
75
-79
18
80
-84
18
85
-89
18
90
-94
18
95
-99
19
00
-04
19
05
-09
19
10
-14
19
15
-19
19
20
-24
19
25
-29
19
30
-34
19
35
-39
19
40
-44
19
45
-49
19
50
-54
19
55
-59
19
60
-64
19
65
-69
19
70
-74
19
75
-79
19
80
-84
19
85
-89
19
90
-94
19
95
-99
20
00
-04
20
05
-09
Ca
pit
al
mo
bil
ity
in
de
x
Significant integration
pre-WW1
Low integration post-
WW2
Rising integration
since the 1990s
16/11/2011
48
Financial openness
Arguments for financial integration:Micro
• Intertemporal exchange– Better allocation of savings– Relaxation of financial constraint
• Technology transfer
Macro
• Shock absorption
Political economy
• Institutions• Policy discipline
pisani-ferry november 2011 95
a) Trade across borders and over time
pisani-ferry november 2011 96
US
RoW
Aircrafts TV sets
US
Row
Future savings Current savings
16/11/2011
49
Global allocation of saving: Theory
• Developed countries:– High capital stock, low return– Ageing population, high savings
• Developing countries– Low capital stock, high return– Younger population, low savings (hence constraints to capital
accumulation and growth, e.g. in Solow model)
� Mutual integration gains� Capital (mostly equity investment) to flow ‘downhill’
pisani-ferry november 2011 97
Intertemporal substitution in a two-period model
• Financial openness allowsdissociating consumption and investment behaviour
• Instead of production possibilities schedule AA, budget constraint DD with
• Optimal consumption is E• Intertemporal exchange is
formally equivalent to international trade
pisani-ferry november 2011 98
C1
C2
EB
D
Dr
YY
r
CC
++=
++
11
21
21
A
A
A
16/11/2011
50
However no evidence of correlation of NFA with development level
pisani-ferry november 2011 99
Worse: capital has been flowing uphill
pisani-ferry november 2011 100
Source Prasad et al.
Average income of capital-exporting and capital-importing countries, 1970-2005
Source: Prasad et al.
16/11/2011
51
b) Shock absorption
• Benefits from openness– Risk diversification through capital outflows– Consumption smoothing in case of temporary incomeshocks
• Important for small, specialised economies (e.g. commodityexporters)
• Illustrated by US regions (Asdrubali, Sorensen and Yosha1996). Channels of absorption of shocks to primary income:– Portfolio diversification: 39% of shock– Credit………………………….. 23%– Federal transfers…………. 13%– Total……………………….…… 75%
• Suggests major benefits from financial openness
pisani-ferry november 2011 101
Shock absorption or shock propagation?
pisani-ferry november 2011 102
0
100
200
300
400
500
600
700
800
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
US
do
lla
r b
illi
on
s
Source: IMF, WEO database
Net private capital flows to developing
countries
Other private financial
flows, net
Private portfolio flows, net
Direct investment, net
16/11/2011
52
Financial opening, institutions and corruption
pisani-ferry november 2011 103Source Kose Prasad Rogoff et Wei 2006
The political economy approach to financial openness
pisani-ferry november 2011 104
Source Kose Prasad Rogoff et Wei 2006
A
16/11/2011
53
Summing up: The post-Asian crisis view on financial openness
pisani-ferry november 2011 105Source Kose Prasad Rogoff et Wei 2006
pisani-ferry november 2011 106
Choosing an exchange rate regime
• “No single exchange rate regime is right for all countries or at all times” (Jeff Frankel)
• Considerable variation of choices across countries..
– euro area / UK– Asia/ Latin America
• ..and over time
– Succession of ‘fads’: soft pegs in the 1970s, hard pegs in the 1990s; intermediate regimes in the 1980s, corner solutions in the 2000s
• Why? Choice of a regimes depends on:
– Micro criteria– Macro criteria– Political economy criteria– International coordination criteria
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pisani-ferry november 2011 107
Micro criteria
• Several monies =– Transaction costs (« tax ») – Exchange rate uncertainty– Both imply blurred relative price signals
« Money is a convenience and this restrictsrestricts the optimum number of currencies”
(Mundell, 1961)
pisani-ferry november 2011 108
How large the micro costs/benefits?
• No time-series evidence of costs of exchange rate volatility
• Cross-country evidence highlights ‘border effects’, however currency effects hard to disintangle from other effects– Frankel-Rose: monetary union would multiply tradeby a factor 3 in the long run
– Baldwin : so far effects of the euro have been + 5 to +15%
– Mayer and Ottaviano 2009: no significant effects on extensive margin
16/11/2011
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pisani-ferry november 2011 109
Macro criteria
• Poole (1970): the good monetary regime is the one that best provides stabilisation
• Assume:– Yi= ΣaikXk+ εi model– L = L(Y1,… Yn) macro loss function
• Criterion is to choose exogenous variables Xk in order to minimise E(L) conditionally to shocks εi
• Hence good monetary regime depends on distribution of shocks
• Same approach can be used for exchange rate regime
pisani-ferry november 2011 110
The Poole approach
• If real demandshocks (IS shifts) dominate, bettercontrol money supply -> floatingexchange rates
• If money demandshocks dominate (LM shifts), the opposite holds
Y0Y’LMY’II
ISIS’
II
LM
IS’
16/11/2011
56
pisani-ferry november 2011 111
Exchange rate regime and economic performance
Taux de croissance moyen du PIB et des prix selon le régime de change dans 10 pays émergents d’Asie
Régime de change Croissance du PIB
Inflation
Ancrage fixe 6% 4,8%
Ancrage glissant 6,5% 7,4%
Flottement administré 6% 7,5%
Flottement libre 8,4% 9,2%
Episodes de dévaluation 2,2% 8,4%
Source : Coudert et Dubert (2004)
pisani-ferry november 2011 112
Implications
• The right exchange rate regime dependson the characteristics of the economy:– Nature and origin of shocks– Internal flexibility
• Examples– Highly specialised countries need flexible exchange rate
– Transition countries were right to choose fixedexchange rates initially
• However exchange rate policy choicesoften exhibit (damageable) inertia
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57
pisani-ferry november 2011 113
Credibility
• Major motive during the high inflation period. In the 1980s and the 1990s exchange rate policyoften served as an instrument to fosterdisinflation:– European ERM countries– Latin America– CEECs
• Reason was often low internal credibility• Fixed exchange rate served to « import » credibility
Example: Argentina
pisani-ferry november 2011 114
16/11/2011
58
pisani-ferry november 2011 115
A simple model
θ
γ
βθω
ββ
θω
β
βθω
ββ
θ
γ
θγω
β
≥++
+−
−+
=++
+−=
=>
++−+=
=−+= −
2
2
222
1
]ˆ)1[(
:ifn devaluatio be willereHowever th
inflation reduce thereforerates exchange Fixed
)1(~ˆ nsexpectatio rationalunder and
]ˆ)1[(~ˆ
n,devaluatioWithout
regime rate exchange fixedunder inflation ofcost higher therepresents
ndevaluatio ofcost political therepresents
ndevaluatio if 1 Z1, k where
ˆZ)-(1Z)(ˆ
)ˆ(ˆ avec )ˆˆ(
a
a
tt
aa
pyk
ykppyk
p
pykypL
pEpppyy
pisani-ferry november 2011 116
Implications
• Fixed exchange rates a solution if:– Incentives to inflation are strong (k large)– The central bank is not credible (ω small)– Inflation expectations are high
• However escape clause leaves door to devaluation open
• This may trigger crisis
16/11/2011
59
pisani-ferry november 2011 117
Coordination
• Floating exchange rates involve risks of non-cooperative policies– Competitive depreciation if adverse demand shock– Competitive appreciation if adverse supply shock
• Fixed exchange rate = institutionalisedcoordination
But• Fixed echange rate favourable if shocks are symmetric, not if shocks are asymmetric
pisani-ferry november 2011 118
Conclusions
Résumé des coûts et bénéfices des régimes de change
Changes fixes Changes flottants
Micro-économie + -
Stabilisation-- si écarts d’inflation
- si chocs réels+ si chocs monétaires
- si chocs monétaires+ si chocs réels
Coordination + -
Crédibilité + en principe, maisrisque de crise
neutre
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pisani-ferry november 2011 119
Monetary union
• Robert Mundell (1961): what is the right geography of money?
• Example : USA - Canada / East – West
• Depends on:– symmetry / asymmetry of schocks
– adjustment mechanisms
• The geography of money does not necessarilycoincides with political geography– supranational currency
– regional currency?
pisani-ferry november 2011 120
Monetary borders in North America
Ea
ste
rn D
olla
r
We
ste
rn D
olla
r
Canadian Dollar
U.S. Dollar
Forestry Car-making
Canada
United States
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pisani-ferry november 2011 121
Flexible exchange rates or monetaryunion between two ‘regions’?
Costs, benefits
Integration
Benefits
Costs
Flexible exchange rates Monetary union
Asymmetries
Adjustments
pisani-ferry november 2011 122
Measuring shocks asymmetry• Descriptive methods
• Variance of real exchange rate across regions
• Correlations of GDP or employment
• These methods do not distinguish between shocks and responses toshocks
• Econometric methods• Panel regressions
• Same criticism applies
• VAR (Bayoumi-Eichengreen) addresses identificationproblem
i
t
i
t
i
t tiyy εβα ++=− − )()(1
=
−
−∑
∞
=s
t
t
t
iii
ii
i
t
t
aa
aaL
pL
yL
ε
ε
0 2221
1211
)1(
)1(
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Evidence on the euro area
pisani-ferry november 2011 123
Share of country-specific shocks in explaining output fluctuations
Source: Giannone and Reichlin (2006)
pisani-ferry november 2011 124
Adjustment mechanisms: US/Europe
Importance
EU
Evolution US EU
Labour mobility strong very weak +
(but slow)
Capital mobility strong med ++
Relative price
flexibility
weak med ?
National budget nil med ?
Federal budget med nil ?
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pisani-ferry november 2011 125
Taking stock: Europe compared to the US benchmark
– Shocks of roughly similar magnitude– Less powerful adjustment mechanisms
Evolution– Schocks : vicious cercle (Krugman) or virtuouscricle (Frankel - Rose) ?
– Ajustement : slow improvement or perverse evolution?
Managing exchange rates
• Longstanding controversy on the effectiveness of foreign exchange intervention
• Mixed evidence depending on:– Capital mobility– Timing of interventions – Goals of interventions
pisani-ferry november 2011 126
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Chinese interventions
pisani-ferry november 2011 127
Japanese interventions
pisani-ferry november 2011 128
0
200
400
600
800
1000
1200
1400
01-ja
nv-0
3
14-ja
nv-0
3
27-ja
nv-0
3
7-Feb
-03
20-F
eb-0
3
05-m
ars-
03
18-m
ars-03
31-m
ars-03
11-A
pr-0
3
24-A
pr-0
3
7-M
ay-0
3
20-M
ay-0
3
02-ju
in-0
3
13-ju
in-0
3
26-ju
in-0
3
09-ju
il-03
22-ju
il-03
4-A
ug-0
3
15-A
ug-0
3
28-A
ug-0
3
10-s
ept-0
3
23-s
ept-0
3
06-o
ct-0
3
17-o
ct-0
3
30-o
ct-0
3
12-n
ov-0
3
25-n
ov-0
3
8-D
ec-0
3
19-D
ec-0
3
105
110
115
120
Achats de dollars et d'euros (milliards de yens, échelle de gauche)
Dollar/yen (échelle de droite)
y = 0,0007%x - 0,2481%
-2,00%
-1,50%
-1,00%
-0,50%
0,00%
0,50%
1,00%
1,50%
2,00%
0 200 400 600 800 1000 1200 1400
Interventions quotidiennes (milliards de yens)
Bais
se (
+)
ou
ha
uss
e (-
) d
u y
en
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Appendices
pisani-ferry november 2011 129
pisani-ferry november 2011 130
Appendix 1: The Marshall-Lerner condition
• Nous avons vu que la réponse du solde extérieur en valeur à une variation du taux de change est a priori ambigue
• Pour lever l’indétermination il faut expliciter les élasticités-prix du commerce extérieur
• Équations standard :
• µ et ν sont les élasticités-revenu• ε et η sont les élasticités-prixdu commerce extérieur
ην
εµ
QYM
QYX
=
= −*
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pisani-ferry november 2011 131
La condition de Marshall-Lerner
• Dévaluation : en faisant initialement Q = 1 et en supposant que M = X,
• où ω est le taux d’ouverture X/Y• Pour que la dévaluation améliore le solde extérieur, il faut que
ε + η ≥ 1 : condition de Marshall-Lerner, dite théorème des élasticités critiques
• Si le solde extérieur est déficitaire, la condition doit être plus stricte
[ ]Q
dQ
PY
dBV
Qd
X
M
M
dM
QX
dX
PY
PX
PY
dBV
QPMddM
Q
PPdXdBV
1
)1
(1
)1
(
−+−=
−−=
−−=
ηεω
pisani-ferry november 2011 132
Marshall-Lerner in practice
Source : Coudert et Couharde 2005
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pisani-ferry november 2011 133
La courbe en J
• En réalité imports et exports ne répondent que progressivement à la variation du change
• Le profil du solde extérieur après une dévaluation est donc une « courbe en J »
• La dynamique peut être enrichie en prenant en compte les effets sur la croissance et l’inflation internes
t
BV
dévaluation