The determination and consequences of international liquidity

Summary In the 20 years since 1969, international reserves have shown considerable increases, that seem to be far in excess of any long-term global need. This was a consequence of the prominent role that the dollar continued to play in the monetary system, which made it easy for the United States to finance balance of payments deficits in its own currency, increasing the amount of dollars in reserves. In addition the Eurodollar market made international reserves to some extent demand/determined: there was a very elastic supply of liquidity in this market. These developments in international reserves have inflationary consequences. To prevent such consequences in the future, central banks should set up a systematic surveillance system for international liquidity together with the IMF and BIS. An essential instrument in this context would be for the United States to finance its balance of payments deficits in foreign currencies in world capital markets.Keynote speech for the Foundation Robert Triffin Szirak on 17 November 1994 in Brussels.     

Rethinking Fast Growth in China＇s Foreign Exchange Reserves

I. Introduction Since 2000, China’s foreign exchange reserves have been growing fast. By the end of 2001, China’s foreign exchange reserves had exceeded US$200bn and by the end of 2002 had reached US$286.4bn. By the end of 2003, it had reached US$403.3bn and in 2004 it reached US$609.9bn. In 1999, China’s foreign exchange reserves accounted for 15.6 percent of its GDP. The ratio has been growing continually and was 36.88 percent of GDP by 2004 (see Table 1), making China the second…     

Policy Responses to Balance-of-Payments Crises: The Role of Elections

Governments have a number of policy tools that can be used to address pressure on the balance of payments, threatening an undesirable decline in the relative value of the national currency. They can: (1) sell reserves, (2) raise interest rates, (3) impose capital controls, (4) apply trade restrictions, or (5) depreciate the currency. While researchers typically analyze these policies in isolation from one another, we treat them as a menu of options available to election-minded politicians. We analyze the use of these five policy responses to payments difficulties for a large sample of countries since the early 1970s. We argue that governments try to minimize political costs by adopting less transparent policies first and only moving to more visible policies as necessary, delaying the most visible and politically costly policies until after elections. The evidence is consistent with these claims: governments are more likely to draw down reserves and impose capital controls before other options. If these policies do not succeed, they tend to raise interest rates. If further action is needed, they delay devaluations and trade protection until after elections.     

Balance-of-payments policy. Instruments and criteria

Summary In this article the author makes clear that in principle targets of economic policy can serve as criteria for balance of payments policy. The instruments of balance of payments policy are discussed in the light of their practical implications. Exchange rate policy is treated as a means of incomes policy. The author argues that only equilibrium of the balance of payments can be considered as a long term criterium for balance of payments policy in the case of stable exchange rates. In the case of flexible exchange rates the criterium can be found in the degree of domestic economic stability.     

Global Imbalance Adjustment: Stylized Facts,Driving Factors and China's Prospects

This paper summarizes global imbalance adjustment after the GFC and analyzes the evolution of balance of payments using a four‐quadrant diagram. We construct the framework of a stock adjustment mechanism to analyze the main driving factors for the imbalance in surplus/deficit countries and debtors/creditors in an attempt to determine the sustainability of imbalance adjustment. We find that imbalances have been reduced to some extent, but most countries have not achieved rebalance after the global financial crisis. Therefore, we propose an ideal path for global imbalance adjustment and summarize the policy practices of representative countries that have followed this route. Based on our analysis, we suggest that China should learn from the Australian experience and adopt a macro‐prudential assessment policy, actively adjust the domestic economic structure and optimize the structure of balance of payments.     

Enkele beschouwingen over geimporteerde inflatie

Summary Imported inflation, in the wide-open Dutch economy regarded as an important contributing force to domestic price inflation, is defined as to include all phenomena that, via external transactions, contribute to general price increases. It is argued that, as a contributing cause, imported inflation is not as prominent as is often thought and certainly not as important as domestic causes. This should not automatically lead to the conclusion that measures against imported inflation need not be taken. Even in the absence of such inflation, these measures, particularly a revaluation, may help stop the domestic price rises. It is argued that the familiar argument of revaluation having harmful effects for the balance of payments is not under all circumstances, and particularly current circumstances, correct.Rede, uitgesproken bij de aanvaarding van het ambt van gewoon hoogleraar aan de Universiteit van Amsterdam op maandag 21 juni 1971     

Demand for International Reserves and Exchange Rate Policy in Taiwan, 1979–1990*

Taiwan has experienced a huge trade surplus and a rapid growth in the money supply since the 1970s. This paper constructs and estimates a model that takes into account the demand for international reserves, price levels, and the joint determination of the exchange rate, the demand for money, and the balance of payments in Taiwan during the period 1979 to 1990. We focus our attention especially on the period from 1986 to 1990 when foreign reserves rapidly accumulated and the appreciation expectations prevailed. Our estimate of exchange rate reaction function accords with what is expected. The exchange rate appreciations had a favourable effect on the stabilization of price levels. In addition, the exchange rate and its expectations play important roles in the demand for money equation.     

我国经济内部失衡与外部失衡关系的实证分析——基于存贷差和外汇储备变动量的关系

我国经济主要面临内部失衡和外部失衡的矛盾,即存贷差过大和外汇储备过多的矛盾。本文经过理论模型的推导,证明了存贷差和外汇储备之间存在一定的关系．并通过实证分析对这一关系进行检验,发现存贷差是外汇储备的格兰杰原因。     

国际铸币税收支对我国经济影响的实证分析

人民币国际化使我国获得国际铸币税收入,由于国际收支顺差导致的外汇储备增加又使我国支出国际铸币税,因此,国际铸币税也有一个收支问题.本文在计算我国1996年-2011年国际铸币税收支情况的基础上,运用相关性和回归方法实证分析了我国的国际铸币税收支对我国经济的影响.最后得出：我国的国际铸币税收支对我国的物价水平、利率水平、汇率水平、财政赤字、净出口没有影响,对我国的GDP、货币供给和外汇储备有影响.     

Navigating the trilemma: Capital flows and monetary policy in China

In recent years China has faced an increasing trilemma—how to pursue an independent domestic monetary policy and limit exchange rate flexibility, while at the same time facing large and growing international capital flows. This paper analyzes the impact of the trilemma on China's monetary policy as the country liberalizes its good and financial markets and integrates with the world economy. It shows how China has sought to insulate its reserve money from the effects of balance of payments inflows by sterilizing through the issuance of central bank liabilities. However, we report empirical results indicating that sterilization dropped precipitously in 2006 in the face of the ongoing massive buildup of international reserves, leading to a surge in reserve money growth.We also estimate a vector error correction model linking the surge in China's reserve money to broad money, real GDP, and the price level. We use this model to explore the inflationary implications of different policy scenarios. Under a scenario of continued rapid reserve money growth (consistent with limited sterilization of foreign exchange reserve accumulation) and strong economic growth, the model predicts a rapid increase in inflation. A model simulation using an extension of the framework that incorporates recent increases in bank reserve requirements also implies a rapid rise in inflation. By contrast, model simulations incorporating a sharp slowdown in economic growth such as that seen in late 2008 and 2009 lead to less inflation pressure even with a substantial buildup in international reserves.     

Optimum international reserves and sovereign risk: Evidence from India

This paper empirically determines the optimal level of international reserves for India by explicitly incorporating the country's sovereign risk associated with the default on external debt. The optimum level of reserves is determined by minimizing the central bank's cost function, which consists of costs due to high reserve holdings and costs due to reserve depletion. The simulated optimum reserves for the period 1994–2010 indicate that actual reserves are higher than the optimum value across the sample period, except during 1997–1998.     

我国外汇储备适度性研究及政策建议

近年来,我国外汇储备规模增长迅速,截止到2008年9月末,国家外汇储备余额已达到19055.85亿美元。外汇储备虽然在平衡国际收支、稳定汇率、应对国际金融危机等方面发挥重要作用,但过量的外汇储备也会增加管理的难度和成本、加大人民币升值的压力,造成资源浪费。为此必须采取相应对策,通过出口产业结构调整、对外投资及实物战略储备等方式积极消除外汇储备增长过快的不利影响。     

国际收支失衡条件下我国货币政策的有效性研究

在开放经济条件下,国际收支活动对国内的货币供给将产生巨大影响。我国目前国际收支中存在经常项目和资本项目双顺差的情况。那么国际收支失衡的条件下,货币当局应该采用什么样的货币政策中介目标,采用什么样的政策工具才能保证宏观调控目标的时间,就成为亟待研究的理论和现实课题。     

Tales from the Bretton Woods

An analogy has been made between the collapse of the Bretton Woods system in 1971 and the recent Eurozone crisis. The build up of TARGET balances in the Eurosystem of Central Banks after 2007 with the GIPS (deficit countries having large liabilities) and Germany (a surplus country) with large claims is seen as similar to the rising and persistent balance of payments deficits and declining gold reserves by the United States as center country of the BWS gold dollar standard in the 1960s. This paper argues that a better Bretton Woods analogy is between the UK which ran persistent balance of payments deficits reflecting low productivity growth and overly expansionary financial policies (an analogy to the GIPS) countries with West Germany which ran persistent balance of payments surpluses reflecting high productivity and conservative financial policies (analogous to Germany today). However Bretton Woods is very different from the Eurozone in many dimensions. An even better analogy than BWS is a comparison of the clearing mechanism in the U.S..--The Gold Settlement account—with the Target payments mechanism for the Eurozone. In the early 1930s massive gold flows from the interior, hard hit by banking panics, to New York City were similar to the payments imbalances within the Eurozone in the recent crisis. The Federal Reserve did little to accommodate the demands for liquidity leading to a collapse of the payments system in March 1933. By contrast the build up of TARGET reflected full accommodation of the liquidity demands of the member states. TARGET represented an institutional innovation that prevented a repeat of the 1930s payments crisis.     

Endogenous Growth and External Balance in a Small Open Economy

This paper puts forward an intertemporal model of a small open economy which allows for the simultaneous analysis of the determination of endogenous growth and external balance. The model assumes infinitely lived, overlapping generations that maximize lifetime utility, and competitive firms that maximize their net present value in the presence of adjustment costs for investment. Domestic securities are assumed perfect substitutes for foreign securities and the economy is assumed small in the sense of being a price taker in international goods and assets markets. It is shown that the endogenous growth rate is determined solely as a function of the determinants of domestic investment, such as the world real interest rate, the technology of domestic production and adjustment costs for investment and is independent of the preferences of domestic households and budgetary policies. The preferences of consumers and budgetary policies determine the savings rate. The current account and external balance are functions of the difference between the savings and the investment rates. The world real interest rate affects growth negatively but has a positive impact on external balance. The productivity of domestic capital affects growth positively but causes a deterioration in external balance. Population growth, government consumption and government debt affect the current account and external balance negatively, but do not affect the endogenous growth rate.     

De gevolgen van de directe prijsbeheersing voor de internationale handel

Summary This paper contains a theoretical analysis of how a maximum price being put on homogeneous commodities affects international trade if rates of exchange are fixed. The consequences of a calculation scheme for fixing prices of differentiated products are also investigated.A maximum price that is lower than the import price is an impediment to import. This leads to oscillations of the import price if demand in the importing country is sufficiently high. The maximum price has no influence if it is higher than the import price. A maximum price that is equal to the export price (which is independent of the supply of the exporting country) retards the decline of export that would occur in consequence of a rise in home demand or a rise in costs of production. As soon as the average revenue per unit of product exported exceeds the maximum price, suppliers will try to export as much as possible. Importation of substitutes is stimulated indirectly and exportation of substitutes is discouraged, whereas the opposite effects occur with respect to complementary goods, materials used in the production process, and goods for the production of which the same materials and factors of production are used.If demand rises, a calculation scheme used for price control will reduce imports and stimulate exports. The calculation scheme reacts only on rises in costs of production that are not recognized officially by the government: imports will be smaller, and exports higher, than in the case of a free determination of prices. Calculation schemes check the importation of substitutes and stimulate their exportation, whereas the opposite effects may occur with respect to complementary goods, or due to changes in the production.In case of a general control of prices when inflation prevails, the whole set of price effects will affect the balance of payments. However, the final result will be uncertain, since some price effects tend to enhance the surplus of the balance of payments whereas others tend to reduce it. At the same time, income effects may affect the balance of payments in the adverse sense.National price control impedes the optimum allocation of resources in an economic community. This is due to the fact that it distorts trade.     

Why does the current account matter?

Summary Professor Lamfalussy discusses the nature and significance of the current account of the balance of payments. After a general analysis he applies his reasoning to the problems connected with the oil-price explosion and their effects on the pattern of current-account positions of various groups of countries. He arrives at two conclusions. The first is probably not very controversial: the international distribution of current-account imbalances deserves to remain in the centre of economic analysis because they are the vehicle for transferring real resources and because the position of its current account may have far-reaching consequences on each country's exchange rate, domestic price developments, income distribution and growth prospects. The second is that for these very reasons policy makers cannot disregard the structure of the balance of payments — even if they will have to realise that it is often not in their power to achieve what would seem to be an optimum structure.     

Postwar monetary policy

Summary Monetary policy has played an active role in Dutch postwar economic policy. Essentially, it has sought to contribute to balanced economic growth by controlling the money supplyM ₂ in relation to national income. Policy measures extend to all sources of money creation-viz. bank credit, public sector finance and the balance of payments - and are predominantly of the quantitative type. This is reflected, among other things, in medium-term targets for the structure and outcome of the balance of payments and the size and coverage of the public sector's borrowing requirement. Internationally, the Netherlands favour and participate in stable exchange rate systems. This has not led to serious conflicts with domestic monetary objectives until the seventies, when excessive easing of monetary conditions had to be accepted temporarily.     

Rules for Correcting External Imbalances

Three aspects to adjustment are sufficiently distinct to be treated separately. The first is the balance of payments concept that is to be adjusted. The candidates are the overall balance of payments, the “basic balance”, and the current account balance. The latter is the preferred concept; specifically, all countries should aim to keep their current balances within a range of +/− 3% of GDP. The second are the instruments to be used to adjust a payments imbalance. The basic analyses are due to Hume and Meade, for the cases in which the country respectively does not and does use variations in the exchange rate as an instrument to facilitate the adjustment process. The third relates to the question of whether the international community should build some mechanism, besides the threat of reserve depletion, that will encourage its members to pursue adjustment. Most deficit countries already have an incentive to adjust. In contrast, the incentives for surplus countries to adjust are weak and need strengthening, perhaps by permitting trade retaliation for an undervalued exchange rate through the WTO or perhaps by taxation. The United States are the most difficult case because the construction of a suitable incentive for this country would probably be dependent on reform of the reserve supply mechanism.     

Indonesia's Transition to a Net Oil Importing Country: Critical Issues in the Downstream Oil Sector

Given its limited oil reserves and increasing petroleum product consumption, Indonesia will become a net oil importer in the near future, facing increasing petroleum product imports while continuing to export still available but diminishing crude oil This paper examines the implications of that prospect for Indonesia's terms of trade, assessing the future supply and demand balance in the domestic market The assessment includes a petroleum price forecast vis-à-vis the international market, in which Indonesia imports more valuable products while exporting less valuable crude oils To meet this challenge, the key policy issue in the downstream oil sector is the need to bring private participation into the refining and retailing business, by means of a freer market pricing policy and private access to the domestic market.