discussion of: crises and international policy coordination sizing official reserves gian maria...
DESCRIPTION
A few general points Global Imbalances Agree that they are not the direct driver of current financial turbulence Direct impact: portfolio shock (decline in demand for US assets--securitized debt) Together with decline in ST interest rates, big decline in USD Sizable correction of CA balance underwayTRANSCRIPT
Discussion of:Crises and International Policy CoordinationSizing Official Reserves
Gian Maria Milesi-FerrettiIMF, Research Department and CEPR
Crises and International Policy Coordination Causes of financial turbulence Global imbalances Yen carry trade Traditional policy coordination? Role of coordination in supervision?
A few general points
Global Imbalances Agree that they are not the direct driver of current
financial turbulence Direct impact: portfolio shock (decline in demand
for US assets--securitized debt) Together with decline in ST interest rates, big
decline in USD Sizable correction of CA balance underway
Global Imbalances (continued)
Importance of valuation changes
US has liabilities in domestic currency, assets in FX Large USD depreciation, underperformance of US
stocks imply that… US position at end-2007 broadly similar to external
position at end-2001
The yen “mystery”
Broadly agree with analysis Carry trade very profitable when implied FX
volatility is very low (as it was for many years) Not just Japanese residents investing
overseas…. …but also foreign investors limting non-equity
exposure (ie, reserves) As MP “normalizes”, reasonable pattern of
portfolio diversification should resume
Policy coordination
What appetite for it? Importance of perceptions of past episodes
(particularly in Asia) Criticism of Multilateral Consultations
overstated (not a standard G-7 communiqué) Key measures in countries’ best interest
Supervision and coordination
Agree that coordination of supervision key No illusions on what can be achieved with
regulation Securitization and risk—the (presumed)
advantage of securitization and much financial innovation was shifting risk to those better able to bear it
Emerging markets
Stronger net external position
Reduced FX exposure
Only “traditional” EM region: emerging Europe (growth, CA deficits). Importance for euro area performance for vulnerabilities
Net foreign asset position, emerging markets (ratio of GDP)
-80%
-60%
-40%
-20%
0%
20%
40%
60%
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
Middle East
Asia
Latin America
Emerging Europe
Discussion of “Sizing official reserves” Dramatic increase in stock of FX reserves in many
EMs
Change in the composition of K-inflows to EMs – increase in portfolio equity flows (and FDI)
Validity of traditional indicators of reserve coverage: changing nature of vulnerabilities/risks?
Increasing stock of reserves….
Foreign exchange reserves(ratio of GDP)
0%
5%
10%
15%
20%
25%
30%
35%
40%
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
Middle East
Asia
Latin America
Emerging Europe
Advanced economies
Falling external debt…..
External debt, emerging markets(share of GDP)
0%
10%
20%
30%
40%
50%
60%
70%
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
Middle East
Asia
Latin America
Emerging Europe
Equitization?
Portfolio equity liabilities (ratio of GDP)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Middle East
Asia
Latin America
Emerging Europe
Advanced economies
Role of FDI…
FDI liabilities (ratio of GDP)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Middle East
Asia
Latin America
Emerging Europe
Some general points on reserve coverage Openness up significantly…but a lot of trade
is in intermediates (inputs for re-export) Comparing FX to (total liab – FDI) is extreme
It may require EMs to be creditors (there are increasing “private” holdings of foreign assets)
Currency risk characteristics of portfolio equity very different from ST for. curr. debt
Reserves increasing, but foreign assets of EMs take other forms as wellForeign exchange reserves
(ratio of total external assets)
0%
5%
10%
15%
20%
25%
30%
35%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Emerging Markets
Advanced