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1. 25 years of excess unemployment in advanced economies: Lessons for monetary policy

Author:
Joseph E. Gagnon and Madi Sarsenbayev
Publication Date:
10-2022
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
For about 25 years before the COVID-19 pandemic, inflation was very low and stable in most advanced economies. A little noticed dark side of this impressive achievement is that unemployment rates were almost always higher than needed to keep inflation low. This widespread and persistent policy error arose because of a major flaw in standard macroeconomic models—the use of a linear Phillips curve. This flaw would have been far less costly if central banks had not chosen such a low target for inflation. This paper thus adds to the arguments in favor of a moderately higher inflation target. Even without a higher target, central banks need to use a broader range of economic models and should verify their estimates of the natural rate of unemployment by running the economy hot from time to time in order to see nascent inflationary pressure before throttling back.
Topic:
Economics, Monetary Policy, Unemployment, and COVID-19
Political Geography:
Global Focus

2. Does the new fiscal consensus in advanced economies travel to emerging markets?

Author:
Olivier Blanchard, Josh Felman, and Arvind Subramanian
Publication Date:
03-2021
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Anew consensus on fiscal policy has emerged in advanced economies, that stimulus is both needed and feasible. At first blush, the scope for stimulus seems even greater in emerging markets, since their primary deficits are smaller and interest-growth differentials more favorable, suggesting that they can sustain much higher levels of debt. But more careful analysis suggests that this is not the case. The authors point out that what matters for debt sustainability are not current conditions but rather the range of possible future outcomes. And prospects for interest rates and growth are more uncertain in emerging markets, while primary balances are more difficult to adjust. As a result, debt limits are in fact tighter than advanced economies. Taking India as a case study, the authors argue that what is needed in the current situation is responsible, slow fiscal adjustment. More generally, one should be careful about importing wholesale the new fiscal consensus into emerging markets.
Topic:
Emerging Markets, Monetary Policy, Fiscal Policy, and Consensus
Political Geography:
Global Focus

3. Securing macroeconomic and monetary stability with a Federal Reserve–backed digital currency

Author:
Julia Coronado and Simon Potter
Publication Date:
03-2020
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The US monetary system faces significant challenges from advances in technology and changes in the macroeconomy that, left unaddressed, will threaten the stability of the US economy and financial system. At the same time, low interest rates mean that central banks will not have the policy ammunition they had in the past during the next recession. The Federal Reserve needs new tools to meet its mandates of price stability and maximum employment. It also needs to preserve the safety and soundness of the financial system in a rapidly digitizing world. The authors propose a Fed-backed digital currency to solve both problems. Their proposal creates a regulated system of digital currency accounts for consumers managed by digital payment providers and fully backed by reserves at the Fed. The system would be limited in size, to preserve the functions and stability of the existing banking system. Fed backing would mean low capital requirements, which would in turn facilitate competition. Low fees and no minimum balance requirements in the new system would also help financial institutions reach the roughly 25 percent of the US population that is currently either unbanked or underbanked. Digital accounts for consumers could also provide a powerful new stabilization tool for both monetary and fiscal policies. For fiscal policy, it could facilitate new automatic stabilizers while also allowing the Fed to provide quantitative easing directly to consumers. This tool could be used in a timely manner with broad reach to all Americans.
Topic:
Economics, Government, Monetary Policy, Banks, and Macroeconomics
Political Geography:
North America and United States of America

4. Reviving the potency of monetary policy with recession insurance bonds

Author:
Julia Coronado and Simon Potter
Publication Date:
04-2020
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
In the second part of their Policy Brief, Coronado and Potter discuss how the system of digital payment providers (DPPs) proposed in their first Policy Brief on this topic adds a new weapon to the monetary toolkit that could be implemented in a timely, effective, and inclusive manner. They describe how a digital currency backed by the Federal Reserve could augment automatic fiscal stabilizers and—more importantly—harness the power of “helicopter” money or quantitative easing directly to consumers in a disciplined manner. To implement QE directly to consumers, Coronado and Potter propose the creation of recession insurance bonds (RIBs)—zero-coupon bonds authorized by Congress and calibrated as a percentage of GDP sufficient to provide meaningful support in a downturn. Congress would create these contingent securities; Treasury would credit households’ digital accounts with them. The Fed could purchase them from households in a downturn after its policy rate hits zero. The Fed’s balance sheet would grow by the value of RIBs purchased; the initial matching liability would be deposits into the DPP system. The mechanism is easy for consumers to understand and could boost inflation expectations more than a debt-financed fiscal stimulus could.
Topic:
Economics, Government, Monetary Policy, and Insurance
Political Geography:
North America and United States of America

5. Automatic stabilizers in a low-rate environment

Author:
Olivier Blanchard and Lawrence H. Summers
Publication Date:
02-2020
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
With interest rates persistently low or even negative in advanced countries, policymakers have barely any room to ease monetary policy when the next recession hits. Fiscal policy will have to play a major and likely dominant role in stimulating the economy, requiring policymakers to fundamentally reconsider fiscal policy. Blanchard and Summers argue for the introduction of what they call “semiautomatic” stabilizers. Unlike purely automatic stabilizers (mechanisms built into government budgets that automatically—without discretionary government action or explicit triggers—increase spending or decrease taxes when the economy slows or enters a recession), semiautomatic stabilizers are targeted tax or spending measures that are triggered if, say, the output growth rate declines or the unemployment rate increases beyond a specified threshold. The authors argue that the trigger should be changes in unemployment rather than changes in output, and the design of semiautomatic stabilizers, whether they focus on mechanisms that rely primarily on income or on intertemporal substitution effects (changing the timing of consumption), depends crucially on the design of discretionary policy.
Topic:
Economics, Government, Monetary Policy, and Finance
Political Geography:
Global Focus and United States of America

6. A program for strengthening the Federal Reserve's ability to fight the next recession

Author:
David Reifschneider and David Wilcox
Publication Date:
03-2020
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
If the Federal Reserve does not decisively change the way it conducts monetary policy, it will probably not be capable of fighting recessions in the future as effectively as it fought them in the past. This reality helped motivate the Fed to undertake the policy framework review in which it is currently engaged. Researchers have suggested many steps the Fed could take to improve its recession-fighting ability; however, no consensus has emerged as to which of these steps would be both practical and maximally effective. This paper aims to fill that gap. It recommends that the Fed commit as soon as possible to a new approach for fighting recessions, involving two key elements. First, the Fed should commit that whenever it runs out of room to cut the federal funds rate further, it will leave the rate at its minimum level until the labor market recovers and inflation returns to 2 percent. Second, the Fed should commit that under the same circumstances, it will begin to purchase longer-term assets in volume and will continue such purchases until the labor market recovers. If the forces driving the next recession are not unusually severe, this framework might allow the Fed to be as effective at fighting that recession as it was in the past. If the next recession is more severe, however, the Fed will probably run out of ammunition even if it takes the two steps recommended here. Therefore, both monetary and fiscal policymakers should consider yet other steps they could take to enhance their ability to fight future recessions.
Topic:
Economics, Monetary Policy, and Federal Reserve
Political Geography:
North America, Global Focus, and United States of America

7. Harry Johnson's "case for flexible exchange rates"—50 years later

Author:
Maurice Obstfeld
Publication Date:
07-2020
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Fifty years ago, Harry G. Johnson published "The Case for Flexible Exchange Rates, 1969," its title echoing Milton Friedman’s classic essay of 1953. Though somewhat overlooked today, Johnson’s reprise was an important element in the late 1960s debate over the future of the international monetary system. In this Working Paper, Obstfeld lays out the historical context in which Johnson’s “Case” was written and read and then examines Johnson’s main points and sees how they stand up to nearly five decades of experience with floating exchange rates since the end of the Bretton Woods system. He also reviews the most recent academic critiques of exchange rate flexibility and asks how fatal they are to Johnson’s basic argument. He concludes that the essential case for exchange rate flexibility still stands strong.
Topic:
History, Monetary Policy, Economy, Central Bank, and Currency
Political Geography:
North America and United States of America

8. Lebanon's monetary meltdown tests the limits of central banking

Author:
Patrick Honohan and Adnan Mazarei
Publication Date:
09-2020
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Lebanon has spent the last 20 years juggling an excessive level of debt and current account deficits. Apparent financial wizardry by the central bank (Banque du Liban) helped keep the exchange rate fixed, inflation low, and debt service flowing until 2020. But these efforts merely postponed the inevitable, at a high cost. Repeated shocks to the Lebanese economy and governance weaknesses pushed the financial contraption over the cliff before the COVID-19 outbreak. The explosion that ripped through the Port of Beirut in early August added to the disarray. The Lebanese pound has crashed, the government has defaulted on some of its debt, and restrictions have been placed on deposit withdrawals and access to foreign exchange. Lebanon faces an uncertain future of uneven suffering. It will need foreign assistance, but such assistance will not extend to covering the losses of the banking system. How the losses are distributed will set the scene for Lebanon’s future development. Policymakers should aim for fairness, predictability, and stability without overindebtedness.
Topic:
Monetary Policy, Financial Crisis, Central Bank, and Banking
Political Geography:
Middle East and Lebanon

9. Global Dimensions of US Monetary Policy

Author:
Maurice Obstfeld
Publication Date:
10-2019
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper is a partial exploration of mechanisms through which global factors influence the tradeoffs that US monetary policy faces. It considers three main channels. The first is the determination of domestic inflation in a context where international prices and global competition play a role, alongside domestic slack and inflation expectations. The second channel is the determination of asset returns (including the natural real safe rate of interest) and financial conditions, given integration with global financial markets. The third channel, which is particular to the United States, is the potential spillback onto the US economy from the disproportionate impact of US monetary policy on the outside world. In themselves, global factors need not undermine a central bank’s ability to control the price level over the long term—after all, it is the monopoly issuer of the numeraire in which domestic prices are measured. Over shorter horizons, however, global factors do change the tradeoff between price-level control and other goals such as low unemployment and financial stability, thereby affecting the policy cost of attaining a given price path.
Topic:
Economics, Government, International Trade and Finance, and Monetary Policy
Political Geography:
North America and United States of America

10. Should Monetary Policy Take Inequality and Climate Change into Account?

Author:
Patrick Honohan
Publication Date:
10-2019
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Should central banks take more account of ethical issues, notably the impact of monetary policy actions on the distribution of income and wealth and on efforts to combat climate change, in the design and implementation of the wider monetary policy toolkit they have been using in the past decade? Although the scope to influence a range of objectives is more limited than is often supposed, and while it is vital to not derail monetary policy from its core purposes, central bank mandates justify paying more attention to such broad issues, especially if policy choices have a significant potential impact. Carefully managed steps in this direction could actually strengthen central bank independence while making some contribution to improving the effectiveness of public policy on these issues.
Topic:
Climate Change, Economics, Monetary Policy, Inequality, and Central Bank
Political Geography:
North America, Global Focus, and United States of America

11. Average Inflation Targeting Would Be a Weak Tool for the Fed to Deal with Recession and Chronic Low Inflation

Author:
David Reifschneider and David Wilcox
Publication Date:
11-2019
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The Federal Reserve faces two important monetary policy challenges: First, since the Great Recession it has struggled to move inflation convincingly up to the 2 percent target level. Second, during the next recession it will struggle to deliver enough support to the economy unless the recession is unusually mild. As a result, the search is on for alternative policy frameworks that might allow the Fed to achieve its monetary policy objectives more effectively. Among the alternatives is average inflation targeting (AIT). The basic idea is simple: Instead of aiming to return inflation over the medium term to the target rate of 2 percent, the Fed would aim to return the average of inflation over some period to the target rate. The crucial innovation of AIT is that when inflation has been running below the target rate, it would have the Fed aim for above-target inflation in the future, in order to bring average inflation up toward the target. Simulations of the Fed’s workhorse econometric model of the US economy (the FRB/US model) suggest that AIT would be a weak addition to the Fed’s policy toolkit for dealing with recessions and persistently low inflation. In addition, simple versions of AIT would sometimes compel the Fed to run an undesirably restrictive monetary policy. AIT is thus not a very appealing alternative to the current framework.
Topic:
Economics, Global Recession, Monetary Policy, and Federal Reserve
Political Geography:
North America, Global Focus, and United States of America

12. : From Rapid Recovery to Slowdown: Why Recent Economic Growth in Latin America Has Been Slow

Author:
Jose De Gregorio
Publication Date:
04-2015
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Latin America's recent economic performance has been disappointing. After a very strong recovery from the Great Recession, growth has slowed considerably, and prospects for 2015 are dim. Among the seven largest economies in the region, output is expected to contract in Argentina, Brazil, and Venezuela, and Chile, Colombia, Mexico, and Peru are projected to grow by only about 3 percent. The decline was not caused by external factors but was mostly cyclical in nature and a result of low productivity. Although monetary and fiscal policies may still have a role in supporting demand in some instances, the main problem in the region is not a lack of demand but low productivity growth. Efforts must be made to foster productivity. Institutional weakness must be addressed and inequality reduced if sustainable high growth is to resume.
Topic:
Economics, International Trade and Finance, Monetary Policy, and Financial Crisis
Political Geography:
Latin America

13. Estimates of Fundamental Equilibrium Exchange Rates, November 2015

Author:
William R. Cline
Publication Date:
11-2015
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The latest semiannual fundamental equilibrium exchange rate (FEER) estimates find that the US dollar is now overvalued by about 10 percent, comparable to levels in 2008 through early 2010 and again in 2011. Unlike then, the current strong dollar does not reflect a weak renminbi kept undervalued by major exchange rate intervention by China. Instead, China's current account surplus has fallen sharply relative to GDP, and its recent intervention has been to prevent excessive depreciation rather than to prevent appreciation. Additionally, declines in the real effective exchange rates (REERs) for major emerging-market economies and resource-based advanced economies, driven by falling commodity prices in recent months, have strengthened the dollar. Recent increases in the REERs for the euro area and Japan have removed their modest undervaluation identified in the last FEERs estimates in May, and the Chinese renminbi remains consistent with its FEER. The dollar's rise by nearly 15 percent in real effective terms over the past two years could impose a drag of nearly one-half percent annually on US demand growth over the next five years. As the Federal Reserve moves to normalize US monetary policy, it may need to consider a gentler rise in interest rates than it might otherwise have pursued, both to temper possible further strengthening of the dollar in response to higher interest rates and to help offset the demand compression from falling net export
Topic:
Economics, International Trade and Finance, Monetary Policy, and GDP
Political Geography:
United States and China

14. Stability Bonds for the Euro Area

Author:
Angel Ubide
Publication Date:
12-2015
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The rules and buffers created in the last few years to enable the euro area to withstand another sudden stop of credit and market-driven panic in one or more of its member states are welcome steps, but they are widely recognized as inadequate. Ubide proposes creating a system of stability bonds in the euro area, to be issued by a new European Debt Agency, to partially finance the debt of euro area countries—up to 25 percent of GDP. These stability bonds should be initially backed by tax revenues transferred from national treasuries, but ultimately by the creation of euro area–wide tax revenues, and used to fund the operations of national governments. They could also be used for euro area–wide fiscal stimulus, to complement the fiscal policies of member states. Such bonds would strengthen the euro area economic infrastructure, creating incentives for countries to reduce their deficits but not forcing them to do so when such actions would drive their economies further into a downturn. The bonds would permit the euro area to adopt a more flexible or expansionary fiscal policy during recessions.
Topic:
Economics, International Trade and Finance, Monetary Policy, and GDP
Political Geography:
Europe

15. Inflation and Activity: Two Explorations and Their Monetary Policy Implications

Author:
Olivier Blanchard, Eugenio Cerutti, and Lawrence H. Summers
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Blanchard, Cerutti, and Summers explore two issues triggered by the global financial crisis. First, in most advanced countries, output remains far below the prerecession trend, suggesting hysteresis. The authors look at 122 recessions over the past 50 years in 23 countries and find that a high proportion of them have been followed by lower output or even lower growth. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. The authors estimate a Phillips curve relation over the past 50 years for 20 countries and find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s but has remained roughly stable since then. The paper concludes with implications for monetary policy.
Topic:
Economics, Labor Issues, Monetary Policy, Financial Crisis, and GDP
Political Geography:
Global Focus

16. Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?

Author:
Olivier Blanchard, Gustavo Adler, and Irineu de Carvalho Filho
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Many emerging-market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. The authors study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, they look at the response of different countries to plausibly exogenous gross inflows and explore the cross-country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, they find that larger FXI leads to less exchange rate appreciation in response to gross inflows.
Topic:
Economics, Emerging Markets, Foreign Exchange, and Monetary Policy
Political Geography:
Global Focus

17. Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence

Author:
Olivier Blanchard, Jonathan D. Ostry, Atish R. Ghosh, and Marcos Chamon
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
The workhorse open-economy macro model suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging-market policymakers, however, believe that inflows lead to credit booms and rising output, and the evidence appears to go their way. To reconcile theory and reality, the authors extend the set of assets included in the Mundell-Fleming model to include both bonds and nonbonds. At a given policy rate, inflows may decrease the rate on nonbonds, reducing the cost of financial intermediation, potentially offsetting the contractionary impact of appreciation. The authors explore the implications theoretically and empirically and find support for the key predictions in the data.
Topic:
Economics, Emerging Markets, International Trade and Finance, and Monetary Policy
Political Geography:
Global Focus

18. Is the European Central Bank Failing Its Price Stability Mandate?

Author:
Ángel Ubide
Publication Date:
02-2014
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Inflation in the euro area is too low, just 0.9 percent year-on-year in December 2013, and inflation expectations, measured from inflation derivative contracts, have shifted lower, indicating that markets expect some small probability of deflation in 2014 and average inflation over the next five years in the 1.25 to 1.5 percent range. The European Central Bank (ECB), however, seems to be content with this outlook. Its current projections show a very slow economic recovery and inflation at just 1.3 percent in two years' time. Yet the ECB describes the risks to inflation as balanced. This puzzling assessment might be due to the fact that the ECB's definition of price stability is less precise than that employed by other central banks, and some ECB members may interpret the definition as setting a ceiling, rather than a target, for inflation at close to but below 2 percent. But if one considers the ECB's self-assessment of success since its creation—achieving 2 percent inflation on average—its current inflation forecast of 1.3 percent would fall short of achieving its price stability mandate.
Topic:
Economics, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
Europe

19. Monetary Policy with Abundant Liquidity: A New Operating Framework for the Federal Reserve

Author:
Joseph E. Gagnon and Brian Sack
Publication Date:
01-2014
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The dramatic increase in the Federal Reserve's balance sheet since 2009 has attracted the attention of economists, pundits, and ordinary citizens. The amount of assets held by the Fed recently crossed $4 trillion and will likely continue to rise to a peak of about $4.5 trillion. This run-up in asset holdings has resulted from the Fed's large-scale asset purchase programs, which were intended to support economic growth. However, a side-effect of these asset purchases is the creation of unprecedented amounts of liquidity in the financial system.
Topic:
Economics, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
United States

20. Addressing Currency Manipulation Through Trade Agreements

Author:
C. Fred Bergsten
Publication Date:
01-2014
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
A bipartisan majority in both Houses of Congress is insisting that the United States include a provision in future trade agreements that would bar currency manipulation. A letter from 60 senators to Secretary of the Treasury Jacob Lew and United States Trade Representative (USTR) Michael From an on September 23, 2013, called for "strong and enforceable foreign currency manipulation disciplines" in the Trans-Pacific Partnership (TPP) while 230 members of the House of Representatives told President Barack Obama on June 6, 2013, that "it is imperative that (the TPP) address currency manipulation.to create a level playing field for American businesses and prevent more US jobs from being shipped overseas." The trade promotion authority (TPA) legislation proposed by congressional trade leaders on January 9, 2014, establishes the avoidance of currency manipulation as a "principal US negotiating objective" in its future trade agreements.
Topic:
Economics, Emerging Markets, International Trade and Finance, and Monetary Policy
Political Geography:
United States

21. Versailles Redux? Eurozone Competitiveness in a Dynamic Balassa-Samuelson-Penn Framework

Author:
Arvind Subramanian and Kevin Stahler
Publication Date:
11-2014
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Prima facie, competitiveness adjustments in the eurozone, based on unit labor cost developments, appear sensible and in line with what the economic analyst might have predicted and the economic doctor might have ordered. But a broader and arguably better—Balassa-Samuelson-Penn (BSP)—framework for analyzing these adjustments paints a very different picture. Taking advantage of the newly released PPP-based estimates of the International Comparison Program (2011), we identify a causal BSP relationship. We apply this framework to computing more appropriate measures of real competitiveness changes in Europe and other advanced economies in the aftermath of the recent global crises. There has been a deterioration, not improvement, in competitiveness in the periphery countries between 2007 and 2013. Second, the pattern of adjustment within the eurozone has been dramatically perverse, with Germany having improved competitiveness by 9 percent and with Greece's having deteriorated by 9 percent. Third, real competitiveness changes are strongly correlated with nominal exchange rate changes, which suggests the importance of having a flexible (and preferably independent) currency for effecting external adjustments. Fourth, internal devaluation—defined as real competitiveness improvements in excess of nominal exchange rate changes—is possible but seems limited in scope and magnitude. Our results are robust to adjusting the BSP framework to take account of the special circumstances of countries experiencing unemployment. Even if we ignore the BSP effect, the broad pattern of limited and lopsided adjustment in the eurozone remains.
Topic:
Economics, Industrial Policy, International Trade and Finance, Monetary Policy, and Financial Crisis
Political Geography:
Europe

22. Official Financial Flows, Capital Mobility, and Global Imbalances

Author:
Joseph E. Gagnon, Tamim Bayoumi, and Christian Saborowski
Publication Date:
10-2014
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
We use a cross-country panel framework to analyze the effect of net official flows (chiefly foreign exchange intervention) on current accounts. We find that net official flows have a large but plausible effect on current account balances. The estimated effects are larger with instrumental variables (42 cents to the dollar on average compared with 24 without instruments), reflecting a possible downward bias in regressions without instruments owing to an endogenous response of net official flows to private financial flows. We consistently find larger impacts of net official flows when international capital flows are restricted and smaller impacts when capital is highly mobile. A further result is that there is an important positive effect of lagged net official flows on current accounts that we believe operates through the portfolio balance channel.
Topic:
Economics, Foreign Exchange, and Monetary Policy

23. Understanding Differences in Growth Performance in Latin America and Developing Countries between the Asian and Global Financial Crises

Author:
Roberto Alvarez and José De Gregorio
Publication Date:
11-2014
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Latin American performance during the global fi nancial crisis was unprecedented. Many developing and emerging countries successfully weathered the worst crisis since the Great Depression. Was it good luck? Was it good policies? In this paper we compare growth during the Asian and global fi nancial crises and fi nd that a looser monetary policy played an important role in mitigating crisis. We also fi nd that higher private credit, more fi nancial openness, less trade openness, and greater exchange rate intervention worsened economic performance. Our analysis of Latin American countries confi rms that eff ective macroeconomic management was key to good economic performance. Finally, we present evidence from a sample of 31 emerging markets that high terms of trade had a positive impact on resilience.
Topic:
Economics, Global Recession, Monetary Policy, and Financial Crisis
Political Geography:
Asia and Latin America

24. Estimates of Fundamental Equilibrium Exchange Rates, November 2014

Author:
William R. Cline
Publication Date:
11-2014
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
This semiannual review finds that most of the major international currencies, including the US dollar, euro, Japanese yen, UK pound sterling, and Chinese renminbi, remain close to their fundamental equilibrium exchange rates (FEERs). The new estimates find this result despite numerous significant exchange rate movements associated with increased volatility in international financial markets at the beginning of the fourth quarter of 2014, and despite a major reduction in the price of oil. The principal cases of exchange rate misalignment continue to be the undervalued currencies of Singapore, Taiwan, and to a lesser extent Sweden and Switzerland, and the overvalued currencies of Turkey, New Zealand, South Africa, and to a lesser extent Australia and Brazil. Even so, the medium-term current account deficit for the United States is already at the outer limit in the FEERs methodology (3 percent of GDP), and if the combination of intensified quantitative easing in Japan and the euro area with the end to quantitative easing in the United States were to cause sizable further appreciation of the dollar, an excessive US imbalance could begin to emerge.
Topic:
Economics, Foreign Exchange, International Trade and Finance, and Monetary Policy
Political Geography:
Africa, United States, Japan, Turkey, South Africa, Brazil, and New Zealand

25. Understanding Differences in Growth Performance in Latin America and Developing Countries between the Asian and Global Financial Crises

Author:
Roberto Alvarez and José De Gregorio
Publication Date:
11-2014
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Latin American performance during the global financial crisis was unprecedented. Many developing and emerging countries successfully weathered the worst crisis since the Great Depression. Was it good luck? Was it good policies? In this paper we compare growth during the Asian and global financial crises and find that a looser monetary policy played an important role in mitigating crisis. We also find that higher private credit, more financial openness, less trade openness, and greater exchange rate intervention worsened economic performance. Our analysis of Latin American countries confirms that effective macroeconomic management was key to good economic performance. Finally, we present evidence from a sample of 31 emerging markets that high terms of trade had a positive impact on resilience.
Topic:
Emerging Markets, International Trade and Finance, Monetary Policy, and Financial Crisis
Political Geography:
Asia and Latin America

26. US Policies toward Liquefied Natural Gas and Oil Exports: An Update

Author:
Gary Clyde Hufbauer and Cathleen Cimino
Publication Date:
07-2014
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Unconventional extraction methods, namely horizontal drilling and fracking, are transforming global energy production, consumption, and trade. Th e extraction of large amounts of oil and gas from shale formations has led to an unprecedented surge of domestic production in the United States. Th e US Department of Energy (DOE) is now processing more than 40 applications from domestic producers to export liquefi ed natural gas (LNG). While experts still disagree about the magnitude and duration of the energy boom, we are at the "dawn of a US oil and gas renaissance" (Houser and Mohan 2014).
Topic:
Economics, International Trade and Finance, and Monetary Policy
Political Geography:
United States and North America

27. The Greek Debt Restructuring: An Autopsy

Author:
Jeromin Zettelmeyer, Christoph Trebesch, and Mitu Gulati
Publication Date:
08-2013
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
The Greek debt restructuring of 2012 stands out in the history of sovereign defaults. It achieved very large debt relief— over 50 percent of 2012 GDP—with minimal financial disruption, using a combination of new legal techniques, exceptionally large cash incentives, and official sector pressure on key creditors. But it did so at a cost. The timing and design of the restructuring left money on the table from the perspective of Greece, created a large risk for European taxpayers, and set precedents—particularly in its very generous treatment of holdout creditors—that are likely to make future debt restructurings in Europe more difficult.
Topic:
Debt, Economics, Monetary Policy, and Financial Crisis
Political Geography:
Europe and Greece

28. How to Form a More Perfect European Banking Union

Author:
Ángel Ubide
Publication Date:
10-2013
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The euro area has made significant strides in the last six months in designing a banking union. The goal has been to centralize supervisory decision making and improve the management of failing banks while protecting European taxpayers and imposing costs on creditors through so-called bail-ins to reduce moral hazard. Euro area leaders have reached some political agreements, and legislation is being prepared for eventual adoption by the European Parliament and then the various member states. This progress has been hailed as a step in the right direction, with particular praise for the euro area leaders' plan to endow the European Central Bank (ECB) with supervisory powers and create new rules for managing troubled banks.
Topic:
Economics, Markets, Regional Cooperation, and Monetary Policy
Political Geography:
Europe

29. Five Challenges for Janet Yellen at the Federal Reserve

Author:
David J. Stockton
Publication Date:
12-2013
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Janet Yellen, who will serve as the 15th chair of the Board of Governors of the Federal Reserve System after her likely confirmation in December 2013, has the experience, intelligence, and judgment to be an excellent successor to Ben S. Bernanke. But she will need to employ all those strengths, and then some, to deal with the challenges facing the nation's central bank. Her success in confronting these challenges will profoundly affect the United States and world economies. Five key challenges await her.
Topic:
Economics, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
United States

30. Estimates of Fundamental Equilibrium Exchange Rates, November 2013

Author:
William R. Cline
Publication Date:
11-2013
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Since the previous estimates of fundamental equilibrium exchange rates (FEERs) in this series in May (Cline 2013), numerous exchange rates have moved substantially in response to the announcement in late May that the US Federal Reserve would likely begin to "taper" its quantitative easing program of large-scale asset purchases. The new estimates here again take as their point of departure the medium-term current account projections of the most recent World Economic Outlook (WEO) of the International Monetary Fund (IMF 2013b). However, because of a seeming inertia in the Fund's projections despite large exchange rate moves, this round of calculations pays special attention to compiling alternative estimates for economies with large changes in exchange rates.
Topic:
Economics, Foreign Exchange, International Trade and Finance, Markets, Monetary Policy, and Governance
Political Geography:
United States

31. Why Growth in Emerging Economies Is Likely to Fall

Author:
Anders Åslund
Publication Date:
11-2013
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Emerging-market growth from 2000 to 2012 was untypically high. This paper highlights the many reasons why emerging-economy growth is likely to be lower going forward. Much of the catch-up potential has already been used up. The extraordinary credit and commodity booms are over, and many large emerging economies are financially fragile. They have major governance problems, so they need to carry out major structural reforms to be able to proceed with a decent growth rate, but many policymakers are still in a state of hubris and not very inclined to opt for reforms. They are caught up in state and crony capitalism. Rather than providing free markets for all, the West might limit its endeavors to its own benefit. Economic convergence has hardly come to an end, but it has probably reached a hiatus that is likely to last many years. The emerging economies need to improve their quality of governance and other economic policies substantially to truly catch up. For a decade or so, the West could take the global economic lead once again as in the 1980s.
Topic:
Economics, Emerging Markets, International Trade and Finance, Monetary Policy, and Governance
Political Geography:
Russia, China, India, South Africa, and Brazil

32. Updated Estimates of Fundamental Equilibrium Exchange Rates

Author:
William R. Cline and John Williamson
Publication Date:
11-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
In 2008 we introduced a semiannual series providing estimates of fundamental equilibrium exchange rates, or FEERs (Cline and Williamson 2008a). The economic concept of FEERs was first set forth by Williamson (1983). An operational method for arriving at multilaterally consistent estimates of FEERs was developed by Cline (2008) and has been applied over the past five years in this series of estimates. This issue marks the valedictory round of the series for Williamson, who is retiring.
Topic:
Economics, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
Europe and Lisbon

33. Hyperinflations Are Rare, but a Breakup of the Euro Area Could Prompt One

Author:
Anders Åslund
Publication Date:
11-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Hyperinflation is one of the most misused words in the English language. Two years ago, I heard a prominent American investor say that we were about to get hyperinflation, “not 15 percent a year as under Jimmy Carter but perhaps 5 percent a year.” Hyperinflation is usually 1,000 percent or more a year. The standard definition by Philip Cagan (1956) is that hyperinflation starts when inflation reaches 50 percent a month, and then the economy is in hyperinflation for one year until monthly inflation falls and stays below 50 percent.
Topic:
Economics, International Trade and Finance, Markets, Regional Cooperation, and Monetary Policy
Political Geography:
Europe

34. How Can Trade Policy Help America Compete?

Author:
Robert Z. Lawrence
Publication Date:
10-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
America deserves credit for not having succumbed to the global financial crisis by repeating the protectionist mistakes of the 1930s. Nonetheless, since 2007, although lip service has been paid to boosting US exports, its trade policy accomplishments have been modest. This is unfortunate because active trade policies can promote American living standards and facilitate America's return to full employment and sustained growth. These policies can also help to create a global trade order that advances American interests. This policy brief argues that the United States needs new initiatives that discipline foreign practices, increase access to foreign markets, revitalize the World Trade Organization (WTO), improve the administrative and regulatory environment for trade, and assist workers and communities adversely affected by change.
Topic:
Economics, Globalization, International Trade and Finance, Markets, Global Recession, Monetary Policy, and Financial Crisis
Political Geography:
United States and America

35. Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups

Author:
Anders Åslund
Publication Date:
08-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
One of the big questions of our time is whether the Economic and Monetary Union (EMU) will survive. Too often, analysts discuss a possible departure of one or several countries from the euro area as little more than a devaluation, but I argue that any country's exit from the euro area would be a far greater event with potentially odious consequences. Exit from the EMU cannot be selective: It is either none or all.
Topic:
Economics, International Trade and Finance, and Monetary Policy
Political Geography:
Europe

36. Combating Widespread Currency Manipulation

Author:
Joseph E. Gagnon Gagnon
Publication Date:
07-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Widespread currency manipulation, mainly in developing and newly industrialized economies, is the most important development of the past decade in international financial markets. In an attempt to hold down the values of their currencies, governments are distorting capital flows by around $1.5 trillion per year. The result is a net drain on aggregate demand in the United States and the euro area by an amount roughly equal to the large output gaps in the United States and the euro area. In other words, millions more Americans and Europeans would be employed if other countries did not manipulate their currencies and instead achieved sustainable growth through higher domestic demand.
Topic:
Economics, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
United States, America, and Europe

37. The Coming Resolution of the European Crisis: An Update

Author:
C. Fred Bergsten and Jacob Funk Kirkegaard
Publication Date:
06-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Getting the diagnosis right is a prerequisite for understanding the euro area predicament and evaluating key decisions taken since early 2010. As we laid out in Bergsten and Kirkegaard (2012), while the euro area faces multiple overlapping and mutually reinforcing elements of fiscal (Greece), banking (Ireland/Spain), and competitiveness (Southern periphery) crises, it is first and foremost facing a crisis of institutional design. The common currency as designed in the Maastricht Treaty of 1992 is a half-built house without the critical components of banking and fiscal union necessary to sustain it through the type of crushing economic and financial down- turn witnessed since October 2008.
Topic:
Economics, International Trade and Finance, Monetary Policy, and Financial Crisis
Political Geography:
Europe

38. Europe's Single Supervisory Mechanism and the Long Journey Towards Banking Union

Author:
Nicolas Véron
Publication Date:
12-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
On June 29, 2012, the heads of state and government of the 17 euro area countries issued a landmark statement that started with the sentences “We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB [European Central Bank] for banks in the euro area the ESM [European Stability Mechanism] could, following a regular decision, have the possibility to recapitalize banks directly” (Euro Area Summit Statement 2012). This statement was received by the investor community and the European public as marking the initial step towards a European banking union, i.e., a shift of the key instruments of banking policy from the national to the European level to enable the formation and maintenance of an integrated European banking system.
Topic:
Economics, Globalization, International Trade and Finance, and Monetary Policy
Political Geography:
Europe

39. Southern Europe Ignores Lessons from Latvia at Its Peril

Author:
Anders Åslund
Publication Date:
06-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
In the current financial crisis plaguing Europe, Latvia stands out for resolving its financial problems quickly and resolutely. After contracting 24 percent in 2008 and 2009, it grew at the rate of 5.5 percent in 2011. The speed and determination. with which the government carried out austerity measures in 2009 and restored confidence after suffering the worst output decline is a crucial lesson for the ailing South European countries—Greece, Italy, Portugal, and Spain. Many policy observers and economists have dismissed Latvia's crisis resolution as irrelevant to the situation in Southern Europe. The Latvian orange, they say, cannot be compared with the South European apples. I argue otherwise.
Topic:
Economics, International Trade and Finance, Monetary Policy, and Financial Crisis
Political Geography:
Europe, Greece, and Latvia

40. Restoring Fiscal Equilibrium in the United States

Author:
William R. Cline
Publication Date:
06-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Halfway through this presidential election year, there is great uncertainty about how, when, and even whether the United States will restore fiscal sustainability. As shown by the near-default because of the impasse over the debt ceiling in July 2011, the two parties have been in sharp opposition on this issue. The Republicans have insisted that adjustment be accomplished by spending cuts rather than tax increases. Two hundred and thirty eight Republican congressmen and 41 Republican senators have signed the Grover Norquist pledge to oppose any attempt to raise marginal tax rates or reduce deductions without implementing offsetting tax reductions. In contrast, Democratic lawmakers have tended to emphasize the maintenance of social and entitlement programs and expressed a willingness to restore higher tax rates if necessary.
Topic:
Economics, Monetary Policy, Financial Crisis, Governance, and Law
Political Geography:
United States

41. Right Idea, Wrong Direction: Obama's Corporate Tax Reform Proposals

Author:
Gary Clyde Hufbauer and Martin Vieiro
Publication Date:
05-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The need for US corporate tax reform is blindingly obvious. Conservatives contend that the top corporate tax rate— whether measured in statutory or effective terms—is the second highest in the Organization for Economic Cooperation and Development (OECD). Liberals argue that the US corporate tax system is riddled with complex “loopholes,” enabling many firms—whether incorporated or not—to pay less than their fair share.
Topic:
Economics, International Trade and Finance, Monetary Policy, and Governance
Political Geography:
United States

42. Does Monetary Cooperation or Confrontation Lead to Successful Fiscal Consolidation?

Author:
Adam S. Posen, Tomas Hellebrandt, and Marilyne Tolle
Publication Date:
04-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Active accommodation of fiscal consolidations by monetary policy is controversial, as can be seen in current euro area discussions. While many observers acknowledge that there is usually a place for monetary accommodation in response to fiscal consolidation, a sequencing argument is often heard today that fiscal commitment must precede any loosening. Some analysts go further to suggest that toughness by central banks taking a hard line on adjustment is critical to inducing sustained fiscal stabilization. This policy brief looks at the recent historical record of central bank behavior vis-à-vis fiscal authorities, at least until the current crisis period, and whether accommodative approaches ahead of consolidations have proven dangerous or helpful. The authors also try to assess the market credibility of fiscal consolidations as a function of the central banks' monetary stance prior to fiscal consolidation. They find clear evidence of positive associations between the degree of monetary ease in advance of fiscal consolidation programs and both those programs' success and their market credibility.
Topic:
Economics, Markets, Monetary Policy, Financial Crisis, and Governance

43. Overlooked Opportunity: Tradable Business Services, Developing Asia, and Growth

Author:
J. Bradford Jensen
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper argues that developing Asia is overlooking an opportunity for increased growth and development through trade in business services. Developing Asia would benefit from liberalizing services trade as it has benefited from liberalizing goods trade. This argument rests on these key findings: business services are important for growth, developing Asia is relatively under-endowed with business services, many business services are tradable, and developing Asia has relatively high barriers to services trade.
Topic:
Economics, Emerging Markets, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
Israel and Asia

44. Assessing Potential Inflation Consequences of QE after Financial Crises

Author:
Samuel Reynard
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Financial crises have been followed by different inflation paths which are related to monetary policy and money creation by the banking sector during those crises. Accounting for equilibrium changes and non-linearity issues, the empirical relationship between money and subsequent inflation developments has remained stable and similar in crisis and normal times. This analysis can explain why the financial crisis in Argentina in the early 2000s was followed by increasing inflation, whereas Japan experienced deflation in the 1990s and 2000s despite quantitative easing. Current quantitative easing policies should lead to increasing and persistent inflation over the next years.
Topic:
Development, Economics, Emerging Markets, Monetary Policy, and Financial Crisis
Political Geography:
Latin America

45. The Services Sector in Asia: Is It an Engine of Growth?

Author:
Donghyun Park and Kwanho Shin
Publication Date:
10-2012
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
The underdeveloped services sector in Asia has the potential to become a new engine of economic growth in developing Asia, which has traditionally relied on export-oriented manufacturing to power its growth. In this paper, Park and Shin empirically analyze the prospects for the services sector in Asia. Their analysis of 12 Asian countries indicates that the services sector has already contributed substantially to the region's growth in the past. Somewhat surprisingly, in light of the difficulty of achieving productivity gains in services, they also find that services labor productivity grew at a healthy pace in much of the region. Overall their analysis provides substantial cause for optimism about the role of the services sector as an engine of growth in Asia. However, they caution that some Asian countries where the services sector is currently struggling, such as Korea and Thailand, will find it more challenging to develop the sector.
Topic:
Economics, Emerging Markets, Industrial Policy, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
Asia

46. The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go?

Author:
Arvind Subramanian and Martin Kessler
Publication Date:
10-2012
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
A country's rise to economic dominance tends to be accompanied by its currency becoming a reference point, with other currencies tracking it implicitly or explicitly. For a sample comprising emerging market economies, we show that in the last two years, the renminbi has increasingly become a reference currency which we define as one which exhibits a high degree of co-movement (CMC) with other currencies. In East Asia, there is already a renminbi bloc, because the renminbi has become the dominant reference currency, eclipsing the dollar, which is a historic development. In this region, 7 currencies out of 10 co-move more closely with the renminbi than with the dollar, with the average value of the CMC relative to the renminbi being 40 percent greater than that for the dollar. We find that co-movements with a reference currency, especially for the renminbi, are associated with trade integration. We draw some lessons for the prospects for the renminbi bloc to move beyond Asia based on a comparison of the renminbi's situation today and that of the Japanese yen in the early 1990s. If trade were the sole driver, a more global renminbi bloc could emerge by the mid-2030s but complementary reforms of the financial and external sector could considerably expedite the process.
Topic:
Development, Economics, Emerging Markets, Foreign Exchange, and Monetary Policy
Political Geography:
China and Asia

47. Capital Account Policies and the Real Exchange Rate

Author:
Olivier Jeanne
Publication Date:
09-2012
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper presents a simple model of how a small open economy can undervalue its real exchange rate using its capital account policies. The paper presents several properties of such policies, and proposes a rule of thumb to assess their welfare cost. The model is applied to an analysis of Chinese capital account policies.
Topic:
Development, Economics, Emerging Markets, and Monetary Policy
Political Geography:
China

48. John Williamson and the Evolution of the International Monetary System

Author:
Edwin M. Truman
Publication Date:
08-2012
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Throughout his brilliant career, John Williamson has frequently focused his considerable analytical skills and powers of persuasion on reform of the international monetary system. This paper examines two principal areas of his concern: (1) exchange rates and the adjustment process, and (2) international liquidity, seigniorage, and the stability of the system. With respect to exchange rates, I find that there has been a moderate reduction in variability, but over the past 40 years external imbalances have, if anything, worsened. The adjustment process has malfunctioned. With respect to international liquidity, reserves have expanded rapidly, but their expansion has been demand-determined, has not involved a remonetization of gold or an increase in inflation. I find that concerns about the size and maldistribution of seigniorage are misplaced. Moreover, we are seeing a steady evolution toward a multicurrency international monetary and financial system. However, reserve diversification does not appear to have adversely affected exchange rate volatility to date. I conclude that the principal benefits of the Bretton Woods international monetary system remain and the principal weaknesses remain. But the system is evolving. It could be improved with respect to the adjustment process and the role of the International Monetary Fund as the international lender of last resort.
Topic:
Economics, Foreign Exchange, International Trade and Finance, International Monetary Fund, Monetary Policy, and Financial Crisis

49. The European Crisis Deepens

Author:
Simon Johnson and Peter Boone
Publication Date:
01-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Successive plans to restore confidence in the euro area have failed. Proposals currently on the table also seem likely to fail. The market cost of borrowing is at unsustainable levels for many banks and a significant number of governments that share the euro.
Topic:
Political Economy, Regional Cooperation, and Monetary Policy
Political Geography:
Europe

50. Global Imbalances and Foreign Asset Expansion by Developing Economy Central Banks

Author:
Joseph E. Gagnon
Publication Date:
03-2012
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Over the past 10 years, central banks and governments throughout the developing world have accumulated foreign exchange reserves and other official assets at an unprecedented rate. This paper shows that this official asset accumulation has driven a substantial portion of the recent large global current account imbalances. These net official capital flows have become large relative to the size of the industrial economies, and they are a significant factor contributing to the weakness of the economic recovery in the major industrial economies.
Topic:
Development, Economics, Emerging Markets, Globalization, Markets, Monetary Policy, and Financial Crisis

51. Capital Account Liberalization and the Role of the Renminbi

Author:
Nicholas R. Lardy and Patrick Douglass
Publication Date:
02-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Despite an erosion of consensus on its benefits, capital account convertibility remains a long-term goal of China. This paper identifies three major preconditions for convertibility in China: a strong domestic banking system, relatively developed domestic financial markets, and an equilibrium exchange rate. The authors examine each of these in turn and find that, in significant respects, China does not yet meet any of the conditions necessary for convertibility. They then evaluate China's progress to date on capital account liberalization, including recent efforts to promote renminbi internationalization and greater use of the renminbi in trade settlement. The paper concludes with an overview of remaining obstacles to convertibility and policy recommendations.
Topic:
Development, Economics, and Monetary Policy
Political Geography:
China

52. Integrating Reform of Financial Regulation with Reform of the International Monetary System

Author:
Morris Goldstein
Publication Date:
02-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper links reform of the international financial regulatory system with reform of the international monetary system because as this recent global crisis demonstrates so vividly, the root causes can come from both the financial and monetary spheres and they can interact in variety of dangerous ways. On the financial regulatory side, I highlight three problems: developing a better tool kit for pricking asset-price bubbles before they get too large; shooting for national minima for regulatory bank capital that are at least twice as high those recently agreed as part of Basel III; and implementing a comprehensive approach to "too-big-to-fail" financial institutions that will rein-in their past excessive risk-taking. On the international monetary side, I emphasize what needs to be done to discourage "beggar-thy-neighbor" exchange rate policies, including agreeing on a graduated set of penalties for countries that refuse persistently to honor their international obligations on exchange rate policy.
Topic:
Economics, International Trade and Finance, Monetary Policy, and Financial Crisis

53. Revitalizing the Export-Import Bank

Author:
Gary Clyde Hufbauer, Meera Fickling, and Woan Foong Wong
Publication Date:
05-2011
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The United States has experienced persistent trade deficits for decades, and thoughtful observers have concluded that deficits cannot be sustained at levels much exceeding 4 percent of GDP annually. There are only two ways to decrease the trade deficit: reduce imports or increase exports. For global economic health, increased exports are a far better proposition.
Topic:
Economics, International Trade and Finance, and Monetary Policy
Political Geography:
United States

54. Estimates of Fundamental Equilibrium Exchange Rates, May 2011

Author:
William R. Cline and John Williamson
Publication Date:
05-2011
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
This policy brief updates our estimates of fundamental equilibrium exchange rates (FEERs) to the latest available data, which for exchange rates are the average rates of April 2011, and for the IMF's balance of payments forecasts, those published in the April 2011 issue of World Economic Outlook (WEO; see IMF 2011a). It is the central study in what has now become a regular annual cycle, in which we draw out what we believe to be the implications of the IMF's forecasts for the pattern that exchange rates need to take if the world is to approach a reasonably satisfactory medium-run position. This past year we also published an interim policy brief (Cline and Williamson 2010b) in which we updated our calculations to the average exchange rates of October 2010, as well as commented on Brazilian Finance Minister Guido Mantega's description of international monetary events as constituting "currency wars." As in the previous year, however, the November 2010 policy brief updated our estimates only for intervening changes in market exchange rates. We did not make use of the IMF's revised autumn WEO forecasts to update our estimates of FEERs; on the contrary, we assumed the FEERs estimated in May 2010 were correct. In contrast, this policy brief presents totally new estimates of FEERs.
Topic:
Economics and Monetary Policy
Political Geography:
United States and China

55. The Outlook for International Monetary System Reform in 2011: A Preliminary Report Card

Author:
Edwin M. Truman
Publication Date:
05-2011
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Reform of the international monetary system was placed on the agenda of the Group of 20 (G-20) a year ago at the initiative of the incoming French leadership of the G-20. On November 4, 2011 in Cannes, France, the G-20 leaders will announce their conclusions and agreements after a year and half of intense dialogue and debate. This policy brief summarizes my preliminary rating of the expected results based on the evidence to date: a barely passing grade on substance but an A for effort. Neither final grade is locked in stone, however.
Topic:
Economics, International Cooperation, International Trade and Finance, International Monetary Fund, Monetary Policy, and Financial Crisis
Political Geography:
France

56. Corporate Tax Reform for a New Century

Author:
Gary Clyde Hufbauer and Woan Foong Wong
Publication Date:
04-2011
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
In his State of the Union address, President Barack Obama stressed four ingredients of American prosperity: faster innovation, better education, less deficit, and more jobs. As the president recognized in his address, the US free enterprise system drives the private sector to innovate, invest, and create jobs. This policy brief concentrates on how reforming the corporate tax system can strengthen the private sector, thereby spurring both innovation and job.
Topic:
Economics, Globalization, International Trade and Finance, Monetary Policy, and Financial Crisis
Political Geography:
United States

57. Getting Surplus Countries to Adjust

Author:
John Williamson
Publication Date:
01-2011
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The world has witnessed two distinct attempts to build a multilateral mechanism to discipline surplus countries that declined to adjust their surpluses, and several proposals are currently on the table to do the same. On the two previous occasions the major surplus country of the day defeated attempts to create such a mechanism, and today China (not to mention Japan or Germany) exhibits no enthusiasm for the idea. Despite the importance of the issue, there has been remarkably little discussion of these proposals.
Topic:
Economics, International Trade and Finance, International Monetary Fund, and Monetary Policy
Political Geography:
Japan, China, and Germany

58. How Flexible Can Inflation Targeting Be and Still Work?

Author:
Adam S. Posen and Kenneth N. Kuttner
Publication Date:
09-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper takes up the issue of the flexibility of inflation targeting regimes, with the specific goal of determining whether the monetary policy of the Bank of England, which has a formal inflation target, has been any less flexible than that of the Federal Reserve, which does not have such a target. The empirical analysis uses the speed of inflation forecast convergence, estimated from professional forecasters' predictions at successive forecast horizons, to gauge the perceived flexibility of the central bank's response to macroeconomic shocks. Based on this criterion, there is no evidence to suggest that the Bank of England's inflation target has compelled it to be more aggressive in pursuit of low inflation than the Federal Reserve.
Topic:
Economics, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
England

59. Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition

Author:
Arvind Subramanian
Publication Date:
09-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Against the backdrop of the recent financial crisis and the ongoing rapid changes in the world economy, the fate of the dollar as the premier international reserve currency is under scrutiny. This paper attempts to answer whether the Chinese renminbi will eclipse the dollar, what will be the timing of, and the prerequisites for this transition, and which of the two countries controls the outcome. The key finding, based on analyzing the last 110 years, is that the size of an economy—measured not just in terms of GDP but also trade and the strength of the external financial position—is the key fundamental correlate of reserve currency status. Further, the conventional view that sterling persisted well beyond the strength of the UK economy is overstated. Although the United States overtook the United Kingdom in terms of GDP in the 1870s, it became dominant in a broader sense encompassing trade and finance only at the end of World War I. And since the dollar overtook sterling in the mid-1920s, the lag between currency dominance and economic dominance was about 10 years rather than the 60-plus years traditionally believed. Applying these findings to the current context suggests that the renminbi could become the premier reserve currency by the end of this decade, or early next decade. But China needs to fulfill a number of conditions—making the reniminbi convertible and opening up its financial system to create deep and liquid markets—to realize renminbi preeminence. China seems to be moving steadily in that direction, and renminbi convertibility will proceed apace not least because it offers China's policymakers a political exit out of its mercantilist growth strategy. The United States cannot in any serious way prevent China from moving in that direction.
Topic:
Economics, Markets, and Monetary Policy
Political Geography:
United States and China

60. The Current Currency Situation

Author:
William R. Cline and John Williamson
Publication Date:
11-2011
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The currency markets have been extremely disturbed for the last three months. The period witnessed a major strengthening of the US dollar in September, then the European currency crisis, a recovery of the euro when the markets believed that the crisis was being controlled, and then a rebound of the dollar. In view of these developments, those who follow currency movements need a new guide as to how the current values of currencies compare to our estimates of fundamental equilibrium exchange rates (FEERs). That is the main object of this paper.
Topic:
Economics, Globalization, International Political Economy, and Monetary Policy
Political Geography:
United States and Europe

61. A Generalized Fact and Model of Long-Run Economic Growth: Kaldor Fact as a Special Case

Author:
Daniel Danxia Xie
Publication Date:
02-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper provides new evidence on the long-run relationship between economic growth and labor's share in national income, based on a comprehensive panel data set for 123 countries from 1950 to 2004. Xie's primary finding is that labor's share follows a cubic relationship with real GDP per capita over the long process of development. At the beginning of the modern economic growth process, the share of labor in national income first decreases until an initial threshold is reached. After that, labor's share keeps increasing until the country's GDP per capita reaches a second threshold before falling again. Xie argues that these dynamics apply not only to the less developed countries in the postwar years, but also to the advanced countries like the United States and the United Kingdom during their early economic take-offs, starting in the late 18th and 19th century, respectively. Finally, he proposes a two-sector constant elasticity of substitution (CES)-type growth model and simulate the model to replicate and explain the possible mechanism behind such a nonlinear pattern of movements in labor's share.
Topic:
Economics, International Trade and Finance, Labor Issues, and Monetary Policy
Political Geography:
United States and United Kingdom

62. Current Account Imbalances Coming Back

Author:
Joseph Gagnon
Publication Date:
01-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper finds statistically robust and economically important effects of fiscal policy, external financial policy, net foreign assets, and oil prices on current account balances. The statistical model builds upon and improves previous explanations of current account balances in the academic literature. A key advance is that the model captures the effect of external financial policies, including exchange rate policies, through data on net official financial flows. Based on current and expected future policies, current account imbalances in major G-20 economies are likely to widen much more in the next five years than projected by the International Monetary Fund (IMF). This paper concludes with a discussion of appropriate policies to prevent widening imbalances.
Topic:
Economics, International Trade and Finance, Markets, and Monetary Policy

63. Asia and Global Financial Governance

Author:
C. Randall Henning and Mohsin S. Khan
Publication Date:
10-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Currently, Asia's influence in global financial governance is not consistent with its weight in the world economy. This paper examines the role of Asia in the International Monetary Fund (IMF) and the Group of Twenty (G-20). It looks in particular at how the relationship between East Asian countries and the IMF has evolved since the Asian financial crisis of 1997–98 and outlines how Asian regional arrangements for crisis financing and economic surveillance could constructively interact with the IMF in the future. It also considers ways to enhance the effectiveness of Asian countries in the G-20 process.
Topic:
Development, Economics, Emerging Markets, Globalization, International Trade and Finance, and Monetary Policy
Political Geography:
Israel and Asia

64. An Update on EU Financial Reforms

Author:
Nicolas Véron
Publication Date:
12-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
In the context of a transatlantic comparison, the first thing to be mentioned is the difference between the time sequence of financial reforms in the European Union and its equivalent in the United States. The financial crisis started simultaneously on both sides of the Atlantic, with the initial disruption of some financial market segments in August 2007 and the major panic episode of September through October 2008. But they are not at the same stage of policy reaction and especially regulatory reform now. At least four reasons can be identified for this difference.
Topic:
Economics, Global Recession, Monetary Policy, and Financial Crisis
Political Geography:
United States and Europe

65. Strengthening IMF Surveillance: A Comprehensive Proposal

Author:
Edwin M. Truman
Publication Date:
12-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The central challenge facing the global economy and financial system today is the failure of countries to limit the negative effects of their policies on other countries and on global economic and financial stability. The most prominent manifestations of this challenge are the balance-of-payments adjustment process and the notorious asymmetry therein, spillovers from other countries' financial-sector policies such as those involved in the crisis of 2007–10, and the prospect of sustained unbalanced growth in the global economy with some countries overheating and others facing substantial excess capacity. Against this background, I propose an approach to strengthened IMF surveillance over the economic and financial policies of its member countries.
Topic:
Economics, Globalization, International Monetary Fund, Monetary Policy, and Financial Crisis

66. How Europe Can Muddle Through Its Crisis

Author:
Jacob Funk Kirkegaard
Publication Date:
12-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
As Europe's financial market contagion spreads to systemically important eurozone members, the region is echoing with "end-game scenarios" (Johnson and Boone 2010) and demands for major new steps by European policymakers (Financial Times 2010). Among these would be a European "fiscal transfer union," a new common eurozone bond, action by the European Central Bank (ECB) to monetize sovereign debts, and finally a eurozone breakup itself.
Topic:
Debt, Economics, Monetary Policy, and Financial Crisis
Political Geography:
Europe

67. Confronting Asset Bubbles, Too Big to Fail, and Beggar-thy- Neighbor Exchange Rate Policies

Author:
Morris Goldstein
Publication Date:
02-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
When pondering desirable reforms, I prefer to think about both the international financial system and the international monetary system because as this global crisis demonstrates so vividly, the root causes can come from both the financial and the monetary spheres and they can interact in a variety of ways. On the financial side, I want to emphasize two problems: pricking asset price bubbles before they get too large, and confronting “too big to fail.” On the monetary side, I want to concentrate on what can be done to discourage “beggar-thyneighbor” exchange rate policies.
Topic:
Economics, Monetary Policy, and Financial Crisis

68. Notes on Equilibrium Exchange Rates: January 2010

Author:
William R. Cline and John Williamson
Publication Date:
01-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
In June 2009 we issued our annual update of estimates of fundamental equilibrium exchange rates (FEERs) for 34 major economies (Cline and Williamson 2009). At that time the dollar had already begun correction from the substantial overvaluation that had arisen from the strong safe-haven effect associated with the global financial crisis of 2008–09. In this policy brief we report on changes in disequilibria in the exchange markets since the date those earlier calculations referred to, namely March 2009. We first present estimates of the extent of movement toward FEER-consistent bilateral dollar exchange rates from March to December 31, 2009, and then look at how effective exchange rates have altered in the same period. We also re-estimate the FEER-consistent dollar rate for one important currency, the Korean won.
Topic:
Economics, Foreign Exchange, International Political Economy, and Monetary Policy
Political Geography:
Korea

69. New PPP-Based Estimates of Renminbi Undervaluation and Policy Implications

Author:
Arvind Subramanian
Publication Date:
04-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Is there reason to add to the proliferating set of estimates on the extent of renminbi undervaluation (see among others, Bergsten 2010; Cline and Williamson 2008 and 2010; Goldstein and Lardy 2008 and 2009; Frankel 2008; Reisen 2009; and Lee et al. 2008)? Yes, not least because these new estimates: (1) suggest that purchasing power parity (PPP)-based approaches to measuring renminbi undervaluation suggest that China's currency is undervalued by about 30 percent against the dollar and not the 12 percent recently reported (Bajaj 2010); and (2) are closer to and consistent with alternative approaches to estimating renminbi undervaluation.
Topic:
Economics, Foreign Exchange, International Political Economy, and Monetary Policy
Political Geography:
China

70. The Substitution Account as a First Step Toward Reform of the International Monetary System

Author:
Peter B. Kenen
Publication Date:
03-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Today, the international monetary system is based largely on the US dollar, but reserve currency diversification has begun, thanks to the advent of the euro, and it is apt to continue. Eventually, the renminbi could acquire reserve currency status, and the resulting reserve currency diversification could be more disruptive than it has been to date. To forestall that possibility the quasi-currency issued by the International Monetary Fund (IMF), Special Drawing Rights (SDRs), could be made to play a larger role in the international monetary system, precluding potentially disruptive diversification and achieving more orderly growth in the stock of international reserves.
Topic:
Economics, International Political Economy, International Trade and Finance, and Monetary Policy
Political Geography:
United States

71. The Winter of Their Discontent: Pyongyang Attacks the Market

Author:
Stephan Haggard and Marcus Noland
Publication Date:
01-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
On November 30, 2009, North Korea announced a reform to replace all currency in circulation with new bills and coins. North Korean officials have made no bones about their motivations: The “reform” constitutes a direct attack on the emerging market economy and the independence from state control that it represents. In an interview following the conversion, an official of the North Korean central bank noted that the reform was aimed at curbing private trade and underlined that North Korea is “not moving toward a free market economy but will further strengthen the principle and order of socialist economic management.”
Topic:
Economics, Markets, and Monetary Policy
Political Geography:
North Korea

72. The Design and Effects of Monetary Policy in Sub-Saharan African Countries

Author:
Mohsin S. Khan
Publication Date:
07-2010
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Since the 1990s there have been a number of major changes in the design and conduct of monetary policy. In a globalized environment, there is less time to adjust to shocks and greater need to achieve closer convergence of economic performance among trading partners. As a result, a number of developing countries have adopted exchange rate regimes with more flexibility, and thereby greater scope for monetary policy. Notable examples include a number of sub-Saharan African countries moving from fixed exchange-rate regimes to more flexible regimes and the adoption of formal or informal inflation targeting regimes by some of these countries. These changes have triggered considerable debate on how monetary policy should be conducted and the effects it has on the real economy.
Topic:
Economics and Monetary Policy
Political Geography:
Africa

73. The Realities and Relevance of Japan's Great Recession: Neither Ran nor Rashomon

Author:
Adam S. Posen
Publication Date:
06-2010
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Japan's Great Recession was the result of a series of macroeconomic and financial policy mistakes. Thus, it was largely avoidable once the initial shock from the bubble bursting had passed. The aberration in Japan's recession was not the behaviour of growth, which is best seen as a series of recoveries aborted by policy errors. Rather, the surprise was the persistent steadiness of limited deflation, even after recovery took place. This is a more fundamental challenge to our basic macroeconomic understanding than is commonly recognized. The UK and US economies are at low risk of having recurrent recessions through macroeconomic policy mistakes—but deflation itself cannot be ruled out. The United Kingdom worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. Also, Japan did not face poor prospects for external demand and the need to reallocate productive resources across export sectors during its Great Recession. Many economies do now face this challenge simultaneously, which may limit the pace of, and their share in, the global recovery.
Topic:
Economics, Markets, Monetary Policy, and Financial Crisis
Political Geography:
United States, Japan, and United Kingdom

74. Estimates of Fundamental Equilibrium Exchange Rates, May 2010

Author:
William R. Cline and John Williamson
Publication Date:
06-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
This policy brief updates our estimates of fundamental equilibrium exchange rates (FEERs) to the latest issue of the World Economic Outlook (WEO) published by the International Monetary Fund in April 2010 (IMF 2010a). It is part of what has now become an annual cycle drawing out what we believe to be the implications of the IMF's forecasts for the pattern that exchange rates need to take if the world is to approach a reasonably satisfactory medium-run equilibrium position. This year we also published an interim report (Cline and Williamson 2010), partly drawing on the October 2009 WEO but essentially examining the implications of the pattern of market exchange rates as of January 1, 2010 for how misaligned currencies were at that time, assuming that the FEERs estimated in June 2009 were correct. In this publication we have estimated the FEERs anew on the basis of revisions in the methods employed and new data presented in the April 2010 WEO, after incorporating adjustments to the IMF forecast needed to take account of recent changes in exchange rates and especially the euro.
Topic:
International Relations, Economics, International Monetary Fund, and Monetary Policy

75. Higher Taxes on Multinationals Would Hurt US Workers and Exports

Author:
Gary Clyde Hufbauer and Theodore H. Moran
Publication Date:
05-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
As presidential candidate, Barack Obama repeatedly advocated tax “reforms” aimed squarely at US-based multinational enterprises (MNEs). As president, he again declared—in the same State of the Union address that laid out an ambitious goal for export expansion—that “it is time to finally slash the tax breaks for companies that ship our jobs overseas, and give those tax breaks to companies that create jobs right here in the United States of America."
Topic:
Economics, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
United States

76. Renminbi Undervaluation, China's Surplus, and the US Trade Deficit

Author:
William R. Cline
Publication Date:
08-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
On June 21, 2010, in the run-up to the G-20 meeting in Toronto, China announced that it would shift to a more flexible exchange rate policy. From mid-June to July 30 the yuan rose 0.8 percent against the dollar. In contrast, the currency had remained fixed (at about 6.83 yuan to the dollar) from September 2008 to early June 2010. Pressure not only from the United States and the European Union but also from Russia, Brazil, and India as well as the IMF seems likely to have played a role in China's decision, although concerns about domestic inflation may also have been a factor.
Topic:
Economics and Monetary Policy
Political Geography:
United States and China

77. Reform of the Global Financial Architecture

Author:
Edwin M. Truman and Garry J. Schinasi
Publication Date:
10-2010
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper examines the implications of the global financial crisis of 2007–10 for reform of the global financial architecture, in particular the International Monetary Fund and the Financial Stability Board and their interaction. These two institutions are not fully comparable, but they must work more closely in the future to help prevent global financial crises. To this end, the paper identifies institutional and substantive reforms separately and in their joint work that would be desirable and appropriate.
Topic:
Economics, International Cooperation, International Political Economy, Global Recession, Monetary Policy, and Financial Crisis

78. Currency Wars?

Author:
William R. Cline and John Williamson
Publication Date:
11-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
A widespread currency war is in prospect. The term was first introduced by Guido Mantega, the finance minster of Brazil. He envisaged the International Monetary Fund (IMF) developing an index that measures whether currencies are held artificially low to boost exports (popularly referred to as “currency manipulation”). If that IMF exercise did not lead to an easing of such exchange market intervention, he suggested that an undervalued exchange rate could eventually be considered a commercial subsidy.
Topic:
Economics, International Cooperation, International Trade and Finance, and Monetary Policy
Political Geography:
Brazil

79. The Central Banker's Case for Doing More

Author:
Adam S. Posen
Publication Date:
10-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
In this policy brief I present my view on the role of monetary policy in our recovery and whether the major central banks in the United Kingdom and beyond should be doing more in the coming months. Of course, every central bank's policysetting committee has to make its own assessment of the right policy measures for its economy, based on its own forecastand the mandate legally set for it. Thus, I am not presuming to offer a “one size fits all” prescription for central bankers beyond the United Kingdom. I would like, however, to try to give some general assessment of the common challenges we face, and what I believe to be the appropriate monetary policy response, barring special circumstances. Not that there will be any doubt about it, but for the record, these are solely my own personal views.
Topic:
Economics, Globalization, Global Recession, Monetary Policy, and Financial Crisis
Political Geography:
United Kingdom

80. Not All Financial Regulation Is Global

Author:
Nicolas Véron and Stéphane Rottier
Publication Date:
09-2010
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
“All politics is local,” as the saying goes, but all economics is global, and regulation is one area where these two realities meet and conflict. This has been particularly true for financial regulation in the wake of the unprecedented financial crisis.
Topic:
Economics, Genocide, International Cooperation, International Trade and Finance, and Monetary Policy
Political Geography:
Europe

81. Sovereign Bankruptcy in the European Union in the Comparative Perspective

Author:
Leszek Balcerowicz
Publication Date:
12-2010
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper distinguishes four alternative sovereign debt resolution mechanisms: pure market solutions, modified market solutions, crisis lending by the IMF and other institutions, and the proposed Sovereign Debt Restructuring Mechanism (SDRM). It is hard to find—at the general level of analysis—the unique advantages of SDRM. The assessment of the European Stabilization Mechanism will ultimately depend on its operation, especially whether it will be a tool of subsidizing countries in debt distress or an instrument of fiscal crisis lending. The present fiscal problems in the eurozone are due to the erosion of fiscal discipline and not to the lack of strong compensatory transfers within the eurozone. The right model to look at the conditions for the stability of the eurozone is not a single state but the gold standard–type system, a system of sovereign states with a (de facto) single currency. Based on this analogy and considering modern developments, three types of measures are needed to safeguard the stability of the eurozone: (1) measures that would reduce the procyclicality of the macroeconomic policies and of the economy; (2) reforms that would help the eurozone economies grow out of increased public debt; and (3) steps to increase the flexibility of the economy so that it can deal with the future shocks in a better way.
Topic:
Debt, Economics, Markets, Monetary Policy, and Financial Crisis
Political Geography:
Europe

82. A Solution for Europe's Banking Problem

Author:
Adam S. Posen and Nicolas Véron
Publication Date:
06-2009
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Since mid-2007, public authorities in the European Union have broadly met the challenge of ensuring a functional degree of liquidity and preventing financial meltdown. The Eurosystem has even been ahead of the curve compared with the Federal Reserve and the Bank of England in discounting early on a wide variety of assets to a range of counterparties. However, despite unprecedented central bank intervention, extensive government guarantees since October 2008, and macroeconomic assistance (with the International Monetary Fund) to the European Union's weakest member states, the underlying state of continental Europe's banking industry remains very fragile.
Topic:
Economics, Markets, and Monetary Policy
Political Geography:
United States, United Kingdom, and Europe

83. US Interests and the International Monetary Fund

Author:
C. Randall Henning
Publication Date:
06-2009
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The United States Congress is now considering whether to raise US commitments to the International Monetary Fund (IMF). A positive decision would ratify President Obama's pledge in early April, taken with the other leaders of the G-20, to bolster the IMF as part of their cooperative response to the global economic crisis. The package of measures advanced by the G-20 leaders would triple the resources available to the Fund to $750 billion and would greatly reinforce its role in the international financial system. However, the IMF remains a controversial institution and congressional support cannot be taken for granted.
Topic:
Debt, Monetary Policy, and Financial Crisis
Political Geography:
United States

84. Understanding Special Drawing Rights

Author:
John Williamson
Publication Date:
06-2009
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
A once-familiar but long-neglected acronym has reappeared in newspapers in recent weeks. We have read that the G-20 meeting in London endorsed a proposal that the International Monetary Fund (IMF) should create $250 billion in Special Drawing Rights (SDRs). We have been told that one problem with this proposal is that most of the SDR allocation would accrue to countries that are unlikely to use them, and some readers may have seen proposed ways around this difficulty. We have read that the governor of the People's Bank of China, Zhou Xiaochuan, has proposed that the SDR should gradually displace the dollar at the center of the international monetary system and that surplus countries should be able to convert their dollar holdings into SDR-denominated assets. No one can doubt that the SDR is back.
Topic:
Economics, International Cooperation, International Political Economy, International Trade and Finance, and Monetary Policy
Political Geography:
United States and China

85. The International Monetary Fund and Regulatory Challenges

Author:
Edwin M. Truman
Publication Date:
12-2009
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
The International Monetary Fund (IMF) plays a substantial regulatory role in the international monetary and financial system. The IMF has been assigned a formal regulatory role in a limited number of areas such as obligations covering exchange rate policies. The Fund has a broader informal regulatory role derived from the voluntary consent of its members such as in surveillance over members' financial sector policies and international payments imbalances. The IMF's regulatory role is unlike that of its member governments within their own jurisdictions. The Fund's formal and informal regulation must be constantly nurtured and renewed via peer-review processes.
Topic:
Debt, Economics, International Organization, International Trade and Finance, International Monetary Fund, and Monetary Policy