International Monetary FundSeptember 17, 2019

The Future of the International Monetary System

BCL-TSE Conference

Gita GopinathEconomic Counsellor

A Snapshot of the current IMS

Sources: European Central Bank; Gopinath (2016), Ilzetzki, E, C M. Reinhart, and K S. Rogoff. “Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold?” Quarterly Journal of Economics 134 (2019) and IMF staff calculations.1/ Average of imports and exports.

Snapshot of the international monetary system(percent)

0

10

20

30

40

50

60

70

Foreignexchangereserves

Internationaldebt

Internationalloans

Invoicing 1/ Globalpaymentcurrency(SWIFT)

US dollar Euro Yen Renminbi

1

Anchor Currency(share of countries; 1946-2015; excludes freely floating cases)

Euro and RMB internationalization: status update

Sources: Bloomberg L.P.; Dealogic; Haver Analytics; People's Bank of China; and ECB(2019).1/ Each lot is equal to 1000 barrels. Front-month refers to contracts with the nearest expiration date.

RMB Settlement, Reserves and Bond Issuance (percent)

2

0

5

10

15

20

25

30

35

Front -month WTIFront-month BrentFront-month Shanghai

Selected Oil Futures Benchmarks(million lots) 1/

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

0

5

10

15

20

25

30

35

2012 2013 2014 2015 2016 2017 2018

RMB’s share as settlement currency in China’s total goods trade (LHS)RMB-denominated reserves held by reporting countries,share of total (RHS)RMB-denominated issued bonds, share of total (RHS)

Composite index of the international role of the euro(percentages; at current and Q4 2018 exchange rates; four-quarter moving averages)

Banking, trade and the making of a dominant currency

3

Trade invoicing Deposit and borrowing

Reserves holding

Eichengreen (2010):“ …experience suggests that the logical sequencing of steps in internationalizing a currency is: first, encouraging its use in invoicing and settling trade; second, encouraging its use in private financial transactions; third encouraging its use by central banks and governments as a form in which to hold private reserves.”

Gopinath and Stein (2018)

Complementarities between invoicing, funding and reserves

Invoicing and bank liabilities Invoicing and bank deposits + loans Invoicing and reserves holding

4

Sources: Gopinath and Stein (2019).

Dol

lar s

hare

in b

ank

liabi

litie

s

Sources: Haver Analytics; OECD, TiVA; ECB (2019), and IMF staff calculations.

About half of EA Trade is with EMs(percent of total extra-EA exports)

0

10

20

30

40

50

60

70

80

90

100

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Advanced economies Emerging Europe Emerging Asia

Latin America Africa Other countries

Reserve potential of the euroEA is well-integrated into global supply chains(participation; percent)

5

0

10

20

30

40

50

60

00 02 04 06 08 10 12 14

euro areaeuro area excluding intra-euro area tradeUnited StatesChina

2014

Sources: Haver Analytics; OECD, TiVA; Gopinath (2016), ECB and IMF staff calculations.

EMs’ trade invoicing (percent)

Trade invoicing and global reserve holdings

6

Global reserve holdings(percent of allocated reserves)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%USD Euros Pound Yen Other

0

10

20

30

40

50

60

70

80

90

100

EM imports EM exports

USD Euro Other

Would issuing Eurobonds help?

7

-1 -0.75 -0.5 -0.25 0 0.25 0.5 0.75 1

-1-0.75-0.5-0.2500.250.50.751

AUS

CAN

CHE

DNK

EMU

GBR

NOR

NZL

SWE

USA

Foreign Investors Domestic Investors

Issu

ing

Coun

try

0.25 0.5 0.75 1

Corporate bond investment denominatedin the issuer’s local currency

Sources: Haver; Maggiori, Neiman and Schreger (2019). 1/ Other AEs include Australia, Canada, Denmark, Japan, Norway, Sweden, and the UK.

Outstanding government debt(USD trillion)

0

2

4

6

8

10

12

14

16

0

5

10

15

20

25

30

US EA (RHS) Other AEs (RHS) 1/

DEU

Strengthening the credibility of the euro

8

Probability of Euro Break-up 1/

• Reforms to complete the euro area architecture will boost credibility

• Union wide: Banking union, capital markets union, central fiscal capacity

• National: Labor, product markets, corporate solvency

What about the potential of stablecoins?

9

Implications of Current IMS

10

Trade invoicing Deposit and borrowing

Reserves holding

• Low export elasticity• ER volatility

• Currency mismatch• Global Financial Cycle

• Demand for safe assets. Historically low interest rates

Sources: Alam and Others (2019); Haver Analytics; Bloomberg, L.P.; IMF, Balance of Payments; and IMF staff estimates.

Policy rates changes since March 2018(percentage points)

Foreign exchange intervention, March-October 2018(cumulative; percent of GDP)

Number of macroprudential and capital flow management measures, 2010-11(number of measures)

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

BRA CHL COL IDN IND MYS PER POL RUS ZAF

1 2 3 4 5 6 cumulative change

-5

-4

-3

-2

-1

0

1

2

BRA CHL COL IDN IND MYS PER POL ROU ZAF0

2

4

6

8

10

12

SGP

PRK

HKG

CAN

NO

R

NZL

SWE

MYS

BRA

PER

TUR

IND

RUS

IDN

POL

Capital flow management measuresMacroprudential measures

Advanced markets Emerging markets

Outflow EpisodeInflow Episode

Dealing with dollar dominance : A case for an integrated policy framework

11

Some Policy trade-offs

Monetary policy/flexible exchange rates

Capital controls

FX intervention

Expenditure switching but weaker under DCP

Negative balance sheet effect and risk of binding borrowing constraint in case of depreciation

Prevent overborrowing and alter debt/consumption profiles

Distort capital flows

Can free up monetary policy by affecting the exchange rate separately

Carry cost

Benefits

Costs

Benefits

Costs

Benefits

Costs

- Not all instruments affect all imperfections

- Instruments interact in complex ways

- More tools = more difficult to communicate

- Clear communication is key in safeguarding efficacy and credibility of monetary policy

12

Modeling the Integrated Policy Framework

Policy Options

• Monetary policy/Exchange rate flexibility

• FX intervention

• Macroprudential policy

• CFMs

Country Characteristics

• Currency of trade invoicing

• Commodity export share

• Financial frictions

Shocks

• Real: Productivity, Commodity price

• Financial: World interest rate, Debt limit, Capital flows