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291. The G20 Meetings: No Common Framework, No Consensus

Author:
Michael Pettis
Publication Date:
05-2009
Content Type:
Policy Brief
Institution:
Carnegie Endowment for International Peace
Abstract:
Participants in the recently completed G20 meeting in London agreed on a number of measures, some substantial and some merely symbolic, but they sidestepped the real issues dividing the major economic powers and, in so doing, failed to address the root causes of the global trade and investment imbalances. This was almost inevitable. China, Europe, and the United States have incompatible conceptual frameworks for understanding the causes of the global financial crisis; furthermore, their conflicting domestic political constraints make agreement on solutions hard to reach. Europeans believe that the root cause of the crisis was excessively deregulated financial systems, and they are skeptical about U.S. and Chinese calls for fiscal expansion, worrying that excessive spending would prolong the imbalances and make the ultimate adjustment more difficult. China also believes that the roots of the crisis lie within the structure of the global financial system, although Beijing insists that it was mainly the reserve status of the U.S. dollar that permitted imbalances to develop to unsustainable levels. China is particularly vulnerable to trade protection and seeks to maintain open markets for its continued export of domestic overcapacity. Like the United States, it is pushing for more aggressive, globally coordinated fiscal expansion. However, because of rigidities in its financial system and development model, its fiscal response to the crisis may exacerbate the difficult global adjustment and may, ironically, increase the chances of trade friction. In a time of contracting demand, the United States controls two-thirds of the most valuable resource in the world: net demand. Consequently, it is U.S. policies that will determine the pace and direction of the global recovery, along with the institutional framework that will govern trade and investment relationships for decades to come. The crisis puts the United States more firmly at the center of the emerging world order than ever. So far, the United States has not understood the need to consider the global outcomes of its recovery policies. Until the major powers can reach consensus about the roots of the imbalance and cooperate on policies to promote recovery, it is likely that the world economy will get worse before it gets better. The United States will drive the recovery process, but in order to do so effectively it will need to recognize its position of strength and negotiate the appropriate agreements with other major powers, especially China, on the pace and nature of the adjustment.
Topic:
Economics, Globalization, International Trade and Finance, and Monetary Policy
Political Geography:
United States, China, Europe, and London

292. 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

293. 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

294. 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

295. How Do We Know This is Not Another Great Depression? Lessons for Policymakers from the 1930s

Author:
Jeffrey Frankel
Publication Date:
07-2009
Content Type:
Policy Brief
Institution:
Belfer Center for Science and International Affairs, Harvard University
Abstract:
The current economic crisis is fundamentally different from those we have experienced in recent past. The proximate causes of previous recessions (1980-2 and 1990-91) were increases in interest rates in response to inflation. This time around, however, low interest rates and loose monetary policy during the period 2003-2005 had contributed to a bubble in asset prices, rather than to inflation. This-coupled with an underestimation of risk in our financial system, failures of corporate governance, and excessive debt by both households and government-caused the crisis of 2007-09.
Topic:
Economics, International Trade and Finance, Monetary Policy, and Financial Crisis
Political Geography:
United States, Japan, and Germany

296. Monetary Policy Challenges for Emerging Market Economies

Author:
Ravi Kanbur, Eswar Prasad, and Gill Hammond
Publication Date:
08-2009
Content Type:
Working Paper
Institution:
The Brookings Institution
Abstract:
This paper introduces a significant collection of papers on monetary policy in emerging market economies, written by leading analysts and policymakers. Does existing economic theory provide lessons that are pertinent for designing effective monetary policy frameworks in emerging markets? What can be learnt from cross-country studies and from experiences of individual countries that have adopted different approaches? While country-specific circumstances and initial conditions matter a great deal in formulating suitable frameworks, are there clear general principles that can serve as a guide in this process? These are among the issues addressed in the dialogue between academics and policymakers represented in the volume. In this paper, we provide an overview of the main issues, linking them to broader debates in the academic literature as well as an assessment of how individual countries have chosen to respond to specific policy challenges and what the consequences have been. We discuss many controversies where there are still sharp differences in views between and amongst theorists and practitioners. We also delineate a few key analytical issues where there is still a yawning gap between theory and practice. In the process, we set out a broad agenda for further re- search in this area.
Topic:
Economics, Emerging Markets, Markets, and Monetary Policy

297. The Human Cost of Economic Crises

Author:
Marcus Alexander, Matthew Harding, and Carlos Lamarche
Publication Date:
04-2009
Content Type:
Working Paper
Institution:
Weatherhead Center for International Affairs, Harvard University
Abstract:
Policy makers rely on a mix of government spending and tax cuts to address the imbalances in the economy during an economic crisis, by promoting price stability and renewed economic growth. However, little discussion appears to focus explicitly on the costs of economic crises in terms of human lives, especially the lives of the most vulnerable members of society, infants. This paper quantifies the effect that economic crises, periods of prolonged economic recession, have on infant mortality. Moreover, we investigate whether different levels of public spending on health across advanced industrialized democracies can mitigate the impact of crises on infant mortality. We find that economic crises are extremely costly and lead to a more than proportional increase in infant mortality in the short-run. Substantial public spending on health is required in order to limit their impact.
Topic:
Economics, Health, Monetary Policy, and Financial Crisis

298. The Estimated Trade Effects of the Euro: Why Are They Below Those From Historical Monetary Unions Among Smaller Countries?

Author:
Jeffrey Frankel
Publication Date:
04-2009
Content Type:
Working Paper
Institution:
Weatherhead Center for International Affairs, Harvard University
Abstract:
Andy Rose (2000), followed by many others, has used the gravity model of bilateral trade on a large data set to estimate the trade effects of monetary unions among small countries. The finding has been large estimates: Trade among members seems to double or triple, that is, to increase by 100-200%. After the advent of EMU in 1999, Micco, Ordoñez and Stein and others used the gravity model on a much smaller data set to estimate the effects of the euro on trade among its members. The estimates tend to be statistically significant, but far smaller in magnitude: on the order of 10-20% during the first four years. What explains the discrepancy? This paper seeks to address two questions. First, do the effects on intra-euroland trade that were estimated in the euro's first four years hold up in the second four years? The answer is yes. Second, and more complicated, what is the reason for the big discrepancy vis-à-vis other currency unions? We investigate three prominent possible explanations for the gap between 15% and 200%. First, lags. The euro is still very young. Second, size. The European countries are much bigger on average than most of those who had formed currency unions in the past. Third, endogeneity of the decision to adopt an institutional currency link. Perhaps the high correlations estimated in earlier studies were spurious, an artifact of reverse causality. We test the hypotheses regarding lags and size directly; and we address the endogeneity problem by means of a natural experiment involving trade between the CFA countries of Africa and the euro countries of Europe. Contrary to expectations, we find little evidence that any of these factors explains a substantial share of the gap, let alone all of it.
Topic:
International Trade and Finance, Bilateral Relations, and Monetary Policy
Political Geography:
Europe

299. Commodity Price Volatility and World Market Integration since 1700

Author:
David S. Jacks, Kevin H. O'Rourke, and Jeffrey G. Williamson
Publication Date:
02-2009
Content Type:
Working Paper
Institution:
Weatherhead Center for International Affairs, Harvard University
Abstract:
Poor countries are more volatile than rich countries, and we know this volatility impedes their growth. We also know that commodity price volatility is a key source of those shocks. This paper explores commodity and manufactures price over the past three centuries to answer three questions: Has commodity price volatility increased over time? The answer is no: there is little evidence of trend since 1700. Have commodities always shown greater price volatility than manufactures? The answer is yes. Higher commodity price volatility is not the modern product of asymmetric industrial organizations - oligopolistic manufacturing versus competitive commodity markets - that only appeared with the industrial revolution. It was a fact of life deep into the 18th century. Does world market integration breed more or less commodity price volatility? The answer is less. Three centuries of history shows unambiguously that economic isolation caused by war or autarkic policy has been associated with much greater commodity price volatility, while world market integration associated with peace and pro-global policy has been associated with less commodity price volatility. Given specialization and comparative advantage, globalization has been good for growth in poor countries at least by diminishing price volatility. But comparative advantage has never been constant. Globalization increased poor country specialization in commodities when the world went open after the early 19th century; but it did not do so after the 1970s as the Third World shifted to labor-intensive manufactures. Whether price volatility or specialization dominates terms of trade and thus aggregate volatility in poor countries is thus conditional on the century.
Topic:
Economics, Globalization, and Monetary Policy
Political Geography:
Africa, South Asia, and Latin America

300. Global capital flows on the rebound?

Publication Date:
10-2009
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
Global capital flows dropped steeply in the wake of the financial crisis, with an unprecedented outflow of foreign funds both from developed and emerging markets.
Topic:
Economics, Globalization, Markets, and Monetary Policy