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321. 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 (PIIE)
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

322. After €urogeddon? Frequently asked questions about the break-up of the euro zone

Publication Date:
11-2011
Content Type:
Working Paper
Abstract:
Thirteen years since its launch, Europe's common currency is in crisis. A Greek debt restructuring is inevitable, and concern is now focusing on contagion among the larger euro area economies. The prospect of a cascade of disorderly sovereign defaults is chilling investors, and the departure of some members from the common currency is increasingly being discussed. The Economist Intelligence Unit's central forecast is that the currency area will survive, but the odds of failure are too high to ignore. To help clients anticipate the implications for their operations of a collapse in the euro zone, we have compiled a list of frequently asked questions (FAQ), exploring the potential scope and impact of a euro-area break-up. We look at what “break-up” could mean, although in practice numerous possible permutations exist between the extremes of departure by a single country and the exit of all 17 members.
Topic:
Economics, International Trade and Finance, Markets, Regional Cooperation, Monetary Policy, and Financial Crisis
Political Geography:
Europe

323. 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 (PIIE)
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

324. Prospects for a Multipolar International Monetary System

Author:
Paul Masson and Mansoor Dailami
Publication Date:
12-2011
Content Type:
Working Paper
Institution:
Danish Institute for International Studies (DIIS)
Abstract:
As the second decade of the 21st century unfolds, the growing clout of emerging markets is paving the way for a world economy with an increasingly multipolar character. The distribution of global growth will become more diffuse, with no single country dominating the global economic scene or even the global security agenda.
Topic:
Economics, Globalization, International Political Economy, Monetary Policy, and Financial Crisis

325. The New "Supercommittee": An "Optimistic" View

Author:
Jared Lobdell
Publication Date:
11-2011
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
An October New York Times story remarked that “with just five weeks until its deadline, a secretive Congressional committee seeking ways to cut the federal deficit is far from a consensus, and party leaders may need to step in if they want to ensure agreement, say people involved in the panel's work.” We have this “supercommittee” of twelve members of Congress, ostensibly for the purpose of cutting a minimum $1.2 trillion from our deficit, chosen by four appointers, none agreeing with any other on exactly what ought to be done, representing mostly diametrically opposing wings of two parties with irreconcilable differences.
Topic:
Debt, Economics, Global Recession, Monetary Policy, and Financial Crisis
Political Geography:
United States

326. Do Germans support the euro?

Author:
Daniel Gros and Felix Roth
Publication Date:
12-2011
Content Type:
Working Paper
Institution:
Centre for European Policy Studies (CEPS)
Abstract:
This paper analyses public support for the euro in Germany. Drawing from the results of regular Eurobarometer surveys, it finds that the ongoing financial and sovereign debt crisis has reduced support for the euro among German citizens, but not dramatically so – at least not yet. In the 1990s, the German public was sceptical towards the euro. But since the introduction of euro banknotes and coins, a clear majority of citizens supports the euro – despite the financial and sovereign debt crisis. Moreover, on average, support for the euro is at a similar level in Germany as it is elsewhere in the euro area.
Topic:
Economics, Regional Cooperation, Monetary Policy, and Financial Crisis
Political Geography:
Europe and Germany

327. Fiscal Asymmetries and the Survival of the Euro Zone

Author:
Paul R. Masson
Publication Date:
12-2011
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation (CIGI)
Abstract:
The independence of the European Central Bank (ECB), seemingly guaranteed by its statutes, is presently under attack. The ECB has been led to acquire large amounts of government debt of the weaker euro zone members, both to help contain their interest costs and to help protect the solvency of banks throughout the zone that hold their debt. This paper presents a model of a dependent central bank that internalizes the government's budget constraint. Using a Barro-Gordon framework, the model embodies both the desire to stimulate output and to provide monetary financing to governments. As a result of the inability to pre-commit to first-best policies, the central bank produces excess inflation — a tendency partially reduced in a monetary union. The model implies that not only shock asymmetries, but also fiscal asymmetries, are important in the membership calculus of desirable monetary unions. On the basis of this framework, calibrated to euro zone data, the current membership is shown not to be optimal: other members would benefit from the expulsion of several countries, notably Greece, Italy and France. A narrow monetary union centred around Germany is sometimes mooted as a preferable alternative, especially if it could guarantee central bank independence. However, simulation results suggest that such a narrow monetary union would not be in Germany's interest: though better than the euro zone with a dependent central bank, it would not internalize enough trade to make it more attractive than the resumption of monetary autonomy by Germany.
Topic:
Debt, Economics, Monetary Policy, and Governance
Political Geography:
Europe, Greece, France, Germany, and Italy

328. 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 (PIIE)
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

329. Do Chinese Really Save Too Much? Aspects from Total Factor Productivity Growth in China since 1952

Author:
Qiong Zhang and Chong-En Bai
Publication Date:
12-2011
Content Type:
Working Paper
Institution:
Walter H. Shorenstein Asia-Pacific Research Center
Abstract:
China's economic growth over the past three decades is unprecedented. Although this growth is commonly attributed to a high domestic savings rate among “thrifty” Chinese, savings alone cannot promote economic growth unless productivity has continuously grown for such a long period. This article uses a one-sector, neoclassical growth model to calibrate the economy to Chinese data since 1952 and finds that measuring changes in total factor productivity between 1952 and 2005 can well capture the secular movements in the Chinese savings rate. Far from supporting the widespread belief that China's savings rate is too high, this article argues that even thrifty Chinese “under-saved” for most of the years during this period; furthermore, the fiscal reforms of 1983 and 1985 further suppressed saving behavior, especially China's economic growth over the past three decades is unprecedented. Although this growth is commonly attributed to a high domestic savings rate among “thrifty” Chinese, savings alone cannot promote economic growth unless productivity has continuously grown for such a long period. This article uses a one-sector, neoclassical growth model to calibrate the economy to Chinese data since 1952 and finds that measuring changes in total factor productivity between 1952 and 2005 can well capture the secular movements in the Chinese savings rate. Far from supporting the widespread belief that China's savings rate is too high, this article argues that even thrifty Chinese “under-saved” for most of the years during this period; furthermore, the fiscal reforms of 1983 and 1985 further suppressed saving behavior, especially when initially implemented. In presenting such findings, this article at least partly solves the so-called “Chinese savings puzzle.”
Topic:
Development, Economics, International Trade and Finance, and Monetary Policy
Political Geography:
China

330. Misguided policies risk breaking up the eurozone and the EU

Author:
Stefano Micossi
Publication Date:
12-2011
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies (CEPS)
Abstract:
I met Tommaso Padoa-Schioppa in the early 1970s as a new young professional in the Research Department of Banca d'Italia, where he was head of the monetary policy unit. Many of us newcomers, fresh from American graduate studies, were appalled by the Bank's monetary approach, replete with quantitative controls and administrative measures to channel funds to an insatiable Treasury.
Topic:
Economics, Regional Cooperation, Monetary Policy, and Governance
Political Geography:
America and Europe