The “exorbitant privilege” and “exorbitant duty” of the United States in the international monetary system: implications for developing countries

The international monetary system may be viewed as a global insurance system, where the United States enjoys the “exorbitant privilege” of a positive yield differential on its external assets and liabilities during normal times, in exchange for the “exorbitant duty” of valuation losses in the form of wealth transfers to the rest of the world during crisis periods. Evidence for 76 economies and 1995–2019 indicates that some other major developed economies also enjoy an exorbitant privilege, though without suffering an exorbitant duty. By contrast, most developing economies neither have an exorbitant privilege nor benefit from wealth transfers. Developing economies as a group recorded negative return differentials and valuation losses during 2010–2019, implying a total return differential of about minus three percentage points between developing and developed economies and an annual average resource transfer from developing economies of about $800bn, or 3.3 per cent of their GDP. Econometric analysis linking crisis insurance strategies and yield differentials indicates that permanent swap arrangements, reserve holdings and regional monetary arrangements can contain negative yield differentials. Developed economies could make part of past resource transfers available to developing economies to finance recovery from the COVID-19 crisis and achieving the 2030 Agenda for Sustainable Development.

     

Capital controls and covered interest parity in the EU: Evidence from a panel-data unit root test

Capital Controls and Covered Interest Parity in the EU: Evidence from a Panel-Data Unit Root Test. - This paper examines whether the abolition of the remaining capital controls in the EU during 1990 has facilitated the achievement of onshore covered interest parity with respect to Germany. We test for unit roots in covered interest differentials. However, we employ the new methodology of pooling our data and performing a unit root test based on a panel data set. Our results suggest that the period characterized by the absence of capital controls has not facilitated the achievement of covered interest parity. Indeed, evidence in favour of covered interest parity is strongest for the period preceding 1990.     

The fundamental determinants of financial integration in the European Union

The Fundamental Determinants of Financial Integration in the European Union. — This paper focuses on the fundamental determinants of the degree of financial integration in the European Union over the period 1974–1993. Using closed interest rate differentials to measure the intensity of capital controls and applying a pooled cross-section time-series approach, the authors find realized inflation, government instability and gross fixed capital formation to have a strong and significantly positive effect on the intensity of capital export controls. In addition, they expect the influence of economic and financial market structure on closed interest rate differentials to increase in the future.     

Capital controls and international trade finance in a dual exchange rate regime: The Belgian experience post-mortem

Capital Controls and International Trade Finance in a Dual Exchange Rate Regime: The Belgian Experience Post-Mortem. — The purpose of the paper is to model “leads and lags” capital flows on the official segment of a dual exchange market and to examine the effects of various types of capital controls imposed by authorities on the official spot and forward exchange markets. The focus of the analysis is the degree of insulation provided by a “dual exchange market cum capital controls” in face of a speculative crisis. The crucial variables in this respect are the deviation from covered interest parity and the forward risk premium. Results of the theoretical model are confronted with empirical evidence over the 1975–85 period.     

Do Capital Inflows Matter to Asset Prices? The Case of Korea*

In the present paper, we investigate whether capital flows induce domestic asset price hikes in the case of Korea. This issue is relevant for crisis‐hit economies trying to prevent a boom–bust cycle as well as in the formulation of macroeconomic policy objectives in emerging market economies. Korea has recently experienced large capital inflows, in particular a surge in portfolio inflows. Furthermore, asset prices, including stock prices, land prices and nominal and real exchange rates, have also appreciated. The empirical results, obtained using a vector autoregression model, suggest that capital inflow shocks have caused stock prices but not land prices to increase. The effects on the nominal and real exchange rates have been limited, which relates to the accumulation of foreign exchange reserves.     

The role of production fragmentation in international business cycle synchronization in East Asia

This paper analyzes factors contributing to the observed increase in international business cycle synchronization between eight East Asian developing countries and the major developed economies of Japan and the United States. To this end, a two-country dynamic general equilibrium (DGE) model is proposed which focuses on the role of production fragmentation among these countries. A key feature of the model is that it includes the trade in differentiated capital goods, which are added to the capital stock for production, and the technology embodied in these capital goods. The parameters of the model are calibrated using actual data of the countries included. Model simulations are conducted for two periods (1993–1997 and 1999–2005), before and after the Asian financial crisis, showing that the increase in business cycle synchronization can be attributed mainly to the growing fragmentation of production activities.     

金融危机中拉美新兴市场国家货币错配变动分析

文章通过分析阿根延、巴西和墨西哥三个新兴市场国家1990--2010年间的货币错配指数与经济增长率之间的关系,利用非抛补利率平价理论分析得出:货币错配是引起金融危机的重要因素;货币错配的急剧增加,对拉美新兴市场国家经济增长有负面影响,大规模的货币错配会使拉美新兴市场国家的货币政策失效.     

Why are currency crises contagious? A comparison of the Latin American Crisis of 1994–1995 and the Asian Crisis of 1997–1998

Why Are Currency Crises Contagious? A Comparison of the Latin American Crisis of 1994–1995 and the Asian Crisis of 1997–1998.—This paper analyzes three channels through which currency crises are transmitted between countries: contagion based on unsustainable economic fundamentals; contagion resulting from herding behaviour in financial markets; contagion induced by close trade integration. The presented model that links currency crises with these three types of contagion is employed to analyze the transmission of the Mexican crisis in 1994–1995 and the Thai crisis in 1997 to other emerging economies. The empirical results show that, first, the most important contagion channels were based on close financial and trade integration rather than on the weakness of macroeconomic fundamentals. Second, the vulnerability to capital flow reversals and weak financial sectors made countries particularly prone to a currency crisis, while external imbalances and currency misalignments were much less important. JEL no. F30, E60, E65, E44     

Credibility of European economic convergence

Credibility of European Economic Convergence. — The authors analyze economic convergence and its relation to European real interest rate differentials using a clustering method on seven macroeconomic key variables for 1979–1995. The results indicate that monetary convergence has progressed considerably but that there is hardly any real convergence in the EU. They also perform pooled nominal and real interest rate regressions with the individual cluster indicators as explanatory variables. The authors find significant positive effects of external (current account) and internal (unemployment ratios, government finance) imbalances on real interest rates. They also group countries according to economic reputation and find that real indicators remain significant for the high-reputation countries.     

State-space estimation of rational bubbles in the Yen/Deutsche Mark exchange rate

State-Space Estimation of Rational Bubbles in the Yen/Deutsche Mark Exchange Rate. — This paper considers a series that uncovered interest parity predicts to be white noise and inspects it for evidence of stochastic rational bubbles. State-space methods are used that specify a bubble component of the series as an unobserved state. The technique’s effectiveness is demonstrated by Monte Carlo experiments. One span of the series is found in which a stochastic rational bubble specification clearly dominates the white noise specification. It coincides with a period of general financial turm-oil in the associated economies, i.e. Japan and Germany during 1989 and early 1990.     

Monetary autonomy in selected Asian economies: The role of international reserves

With the increased financial integration of Asian countries, monetary policy takes on the additional role of maintaining the stability of the financial system along with the traditional objectives of promoting growth and employment with price stability. Given the importance and relevance of monetary policy in Asian countries, we examine monetary autonomy and its interaction with financial integration, currency regimes and international reserves for the past two decades in the following Asian countries: Thailand, Korea, Indonesia, the Philippines, and India. The empirical analysis reveals two significant and interesting findings that have policy implications. First, Thailand, Korea and Indonesia, countries that have moved towards a floating currency regime, experienced simultaneous declines in the sensitivity of their interest rates (thereby increasing monetary autonomy), while India continues to increase the sensitivity of its interest rates with a pegged exchange rate and increased financial integration. Second, in all of the studied economies, the accumulation of international reserves has contributed, to some extent, to the retention of monetary autonomy in terms of preventing the sensitivity of the interest rates from rising. We speculate that the accumulation of reserves plays the role of an anchor for monetary autonomy in emerging market economies facing a “fear of floating”.     

东亚货币合作为何遭遇挫折?——兼论人民币国际化及其对未来东亚货币合作的影响

与1997年亚洲金融危机爆发后东亚各经济体迅速推进了区域货币合作进程不同,此次全球金融危机爆发后不仅既有的合作框架或机制(如CMI等)未能发挥作用,各主要经济体之间有关合作的分歧也在明显增大,东亚货币合作遭遇了重大挫折。文章指出东亚货币合作本身存在的固有矛盾或问题如对现行美元体制的依赖等,是影响其未来发展的长期性因素,决定了在今后相当长时期内东亚地区在整体上不具备推进货币合作深化发展的前提条件。未来东亚货币合作的开展应该在整体层面上巩固和扩大既有成果的同时,在具备条件的局部地区推进货币合作的深化发展。在这方面,人民币国际化战略的实施将发挥重要作用。人民币国际化应该采取周边化→区域化→国际化的路径。     

Openness and Economic Performance: A Comparative Study of China and the Asian NIEs

Being the world's largest developing economy, China's successful economic performance since 1978 has had a powerful impact on the global economy. Its open policy features an evolutionary process, involving the gradual liberalization of foreign exchange, international trade and foreign direct investments. This paper evaluates how this evolutionary process has contributed to China's economic success in comparison with the development experiences of the Asian newly industrialized economies (NIEs). It concludes that despite the economic crisis in 1997–98, China and the NIEs represent a successful development model, which is built upon openness and huge investments in physical and human capital.     

Monetary Policy in the Industrial World: Reflections on some Basic Issues

Abstract

This paper is a general assessment of monetary policy in major OECD countries during the 1990s. Within a simple policy framework that combines money growth, nominal income, and an open economy IS-LM type Mundell-Fleming model, the paper discusses the major strands in the conduct of monetary policy in developed industrial economies. It throws light on such problems as “rules versus discretion”, management of exchange rates, the effect of monetary changes on income and prices, and the rupture of monetary policy with other instruments of economic policy that also affect the economy.     

Toward regional financial and monetary cooperation in East Asia1

The financial and economic crisis in 1997–98 came as a dramatic shock to East Asian economies, and has prompted to institutionalize a regional financial and monetary cooperation. This paper demonstrates the strong will of East Asian countries to develop the regional financial and monetary cooperation, outlines recent developments, and provides possible prospects for the future. It points out that the option to keep consistent with the IMF system actually weakens regional solidarity, and recommends an immediate establishment of a strong regional surveillance and peer pressure mechanism for the Chiang Mai Initiative (CMI) to evolve into a common pool of foreign exchange reserves, a sort of East Asian IMF. It also argues that East Asian countries should closely coordinate their exchange rate regime to maintain intra‐regional and extra‐regional exchange rate stability.     

Spillovers of the Conventional and Unconventional Monetary Policy from the US to South Africa

This paper assesses the effect of US monetary policy on South Africa during the period 1990–2018. We separately analyse and compare the effect of conventional monetary policy, before the Global Financial Crisis, and unconventional monetary policy, after the US monetary policy reached the zero-lower bound. Our impulse response function results indicate that monetary policy in South Africa responds mainly to local inflation, economic activity and financial conditions. While there is strong correlation between the global and South African financial cycle, the financial cycle is not transmitted to the real economy because of the sluggish response of industrial production and domestic credit, especially after the global financial crisis. We see this as an indication of the effects of structural issues to the real economy and constrained households’ balance sheet which has prevented the local economy to take advantage of low local interest rates and the global economic recovery after the crisis.     

Determinants of bond market development in Asia

One of the major reasons behind the Asian financial crisis in 1997 was the excessive dependence of the Asian economies on commercial banks for domestic financing. The region failed to diversify its sources of corporate financing as it relied mainly on banks since its other types of financing, namely bond markets, were still underdeveloped and their sizes were quite small. On the other hand, the 2008 global financial crisis and the ongoing European debt crisis have led to constraints in acquiring local currency and foreign currency liquidity in the corporate sector in Asia as foreign banks withdrew investments from Asia. Furthermore, Asia needs large long term capital (US$ 750 billion per year for 2010–2020) for developing infrastructure connectivity within and across its economies. Local and regional capital can be channeled for long-term infrastructure projects and other productive investment through bond markets. Having a well-developed local currency bond markets can enhance the resilience of domestic financial sector to external shocks and it can facilitate better intermediation of savings into productive investments in Asia. To enhance corporate bond financing, it is important to examine factors that affect the effective development of bond markets in Asia. The study attempts to identify the determinants of bond market development in Asian economies through examining the relationship of bond issuance with selected key financial and economic factors. It also intends to provide policy recommendations for the further development of the Asian bond market. Major determinants for bond market development in Asia include the size of an economy, the stage of economic development, the openness of an economy, the exchange rate variability, the size of the banking system, and interest rate variability.     

Testing Monetary Policy Intentions in Open Economies

Temple (2002) argues that the inflation level used in Romer (1993) lacks power in revealing the policy intentions of monetary authorities, Temple also points out that Romer's use of the openness-inflation correlation cannot be explained by time consistency theory. In this article, we demonstrate that more open economies experience less inflation volatility and persislence. We attribute our findings to the hypothesis that monetary authorities in more open economies adopt more aggressive monetary policies. This pattern emerges strongly after 1990. Our results indicate that the near-universal regime shift in 1990 is not just a simple process of increased monetary policy aggressiveness, but an increased response to economic openness.     

Multinational presence and labour productivity differentials in Indonesian manufacturing, 1975–2001

Foreign multinational corporations (MNCs) have accounted for important shares of employment and production in Indonesian manufacturing since 1975, and these shares increased especially rapidly in the early to mid-1990s. These increases were concentrated in the machinery industries and in MNCs with large foreign ownership shares, and continued through the crisis of 1997–98 and beyond, despite apparently large withdrawals of inward foreign direct investment in 1998 and subsequent years. MNCs generally had much higher average labour productivity than local plants and, after controlling for plant-level variation in electricity consumption per employee, size and vintage, we found that these differentials persisted in about three-quarters of the cases examined. However, there was also large variation in MNC presence and in MNC–local productivity differentials across industries and time, with statistically insignificant differentials most common in apparel and footwear, as well as in MNCs with small foreign-ownership shares.     

A Diagnostic on the West African Monetary Union

Deploying the classical optimum currency areas (OCA) theory and recent developments in the monetary literature, this paper evaluates the appropriateness of West African Monetary Union (WAEMU) as a monetary zone. Nine macroeconomic dimensions are investigated under which the first four items are quantified against a reference economy, namely the United States, the eurozone or China, while the rest are measured in absolute terms for time periods before and after the 2008‐2009 global financial crisis. Results could signify relative dominance of the three world's largest economies to the West African region. In addition to inherent asymmetries across the union, findings suggest the emerging Chinese yuan as an alternative to the euro as the monetary anchor.