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Policy Area Papers on Exchange rate policy

To Establish a Balanced Multi-currency International Reserve System
Xinli Zheng, World Economics, December 2015
The dollar’s important role in the global economy is inevitably contradictory with its role as a sovereign currency. How to solve this contradiction? The combination of a multi-currency international monetary system, mainly made up of dollar, euro and Renminbi (RMB), as well as a super-sovereign currency, for instance special drawing rights (SDR), may be the answer to the Triffin problem and a right path towards the establishment of a stable international reserve currency system. This paper puts forward some ideas, aiming to arouse constructive debates on this issue.
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The Greek Economic Crisis - is the Euro to Blame?
Andreas Hatzigeorgiou, World Economics, September 2014
The euro has been at the centre of reporting and discussion on Greece’s economic crisis. This article analyses the build-up, outbreak and development of the crisis in Greece, with the aim to answer whether the crisis can be traced to the country’s entrance into the Eurozone. By identifying a few of the underlying causes of the crisis, the article concludes that Greece’s crisis cannot be blamed on membership of the EMU. Nor is the financial meltdown and global recession of 2007–2008 to blame. Even without the euro, it is likely that Greece would have found itself in an economic crisis.
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How Safe is SAFE’s Management of China’s Official Foreign Exchange Reserves?
Friedrich Wu, Robbert-Jan Korthals & Ng Kuan Khai, World Economics, June 2013
This paper examines whether the State Administration of Foreign Exchange (SAFE) and its subsidiary SAFE Investment Company (SIC), the sole managers of China’s gargantuan official foreign exchange reserves (OFER) until 2007, have shifted their investment behaviour since the inception of China Investment Corporation (CIC). We find that external conditions such as overexposure to US dollar-denominated assets and declining value of the greenback, as well as internal conditions like the rise of CIC as a rival to manage China’s OFER, have prompted SAFE-SIC to depart somewhat from their pre-2007 conservative style of investing most of China’s OFER in low-yielding foreign government bonds, especially US Treasury bills. Since 2008, SAFE-SIC, in a seeming competition with CIC, have started to pursue higher-risk, higher-return investments. However, we observe that this bolder strategy of SAFE-SIC might not be sustainable for long, because: (a) it duplicates CIC’s explicit mission already set by the State Council to invest in higher-risk, higher-return assets; (b) it runs against SAFE’s core mission to preserve, rather than grow, China’s OFER; and (c) SAFE is tied down by other core responsibilities such as the regulation of China’s foreign exchange administration system, the stewardship towards full capital-account convertibility, and the gradual internationalisation of the renminbi (RMB). As such, engaging in higher-risk, higher-return investments would most likely remain a secondary priority within SAFE’s overall mandate.
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Poor Economic Statistics Fuel China’s Low Consumption Myth
Jun Zhang & Tian Zhu, World Economics, June 2013
The generally held belief that China’s consumption is too low is a myth based on inadequate theory, a misreading of official statistics and the use of market exchange rates for making international comparisons. Chinese official statistics underestimate consumption expenditure on housing, they omit consumption paid for as benefits by the corporate sector, and there are a number of problems with the household expenditure surveys employed. An adjustment for statistical issues suggests that the rate of consumption is 60–65% of GDP, not the 48% based on the widely quoted official statistics figures, and is quite similar to the level experienced by other East Asian economies.
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The Eurozone: What Now?
Graham Bird, World Economics, September 2010
The financial and economic crisis in Greece in 2009/2010 has reawakened interest in the future of the euro and the eurozone. After briefly explaining its sources, this article focuses on the longer-term issues to which the crisis gives rise. It explores the underlying weaknesses of current eurozone arrangements, and assesses whether the crisis will stimulate reforms designed to remedy them. The analysis suggests that, as with many crises, the one in the eurozone will lead to only relatively modest changes; these are unlikely to go much beyond the fairly ad hoc provision of emergency finance. Fundamental reform based on closer fiscal coordination, orderly insolvency arrangements or the establishment of a European Monetary Fund are unlikely. The break-up of the eurozone also seems unlikely. Indeed the crisis may catalyse structural reforms that in the long term increase the eurozone’s durability. The crisis also has important implications for the IMF.
Dollarisation in Theory and Practice
John C. B. Cooper, World Economics, December 2004
Dollarisation involves the replacement of a soft domestic currency with a hard foreign alternative. This paper explains the different forms that dollarisation can take, its consequences for an economy, and concludes by exploring the experience of Panama, a country dollarised since 1904.
Beyond the Ivory Tower: Stanley Fischer on the economics of contemporary global issues
An interview with introduction by Brian Snowdon
World Economics, March 2004
Stanley Fischer had a long and distinguished career as an academic economist at MIT, and was Vice President, Development Economics and Chief Economist at the World Bank, before becoming First Deputy Managing Director of the International Monetary Fund in 1994. He is now President of Citigroup International and Vice Chairman of Citigroup. In this interview, Brian Snowdon discusses with Stanley Fischer several important issues relating to the contemporary world economy, including problems of stabilisation, inflation and growth, the economics and politics of transition, exchange rate regimes, the IMF, the East Asian crisis, and globalisation and economic development.
Exchange Rate Regimes: Is there a third way?
Vijay Joshi, World Economics, December 2003
This paper argues that (a) for many developing countries, the optimal external payments regime would be a combination of an intermediate exchange rate with capital controls and (b) the policy stance and advice of the IMF should reflect this judgement. The paper uses India as a case study to illustrate its argument.
The UK’s Achievement of Economic Stability: How and why did it happen?
Tim Congdon, World Economics, December 2002
The UK achieved a remarkable degree of macro-economic stability in the 1990s. Contrary to expectations when the pound was expelled from the European exchange rate mechanism in September 1992, over the next ten years inflation was kept almost exactly on target and its volatility declined by over 90 per cent compared with the previous 20 years. Stability was achieved when the official aim was to balance the budget and major industries were being de-nationalised, contradicting claims that Keynesian policies are needed.
Japan’s Monetary and Economic Policy
Allan Meltzer, World Economics, September 2002
Japan has gone from very successful policies that promoted growth without inflation to a long period of slow growth, recessions and deflation. The Bank of Japan’s policies are a major reason for deflation. Although the Bank has purchased foreign exchange, it counteracts the inflationary effects of its purchases via sterilization. This forces deflation to continue. Currently, there is a ‘dialogue of the deaf’. The government wants faster growth but does not reform the banking system; the Bank makes bank reform a condition for ending deflationary policies.
Where Do We Stand On Choosing Exchange Rate Regimes in Developing and Emerging Economies?
Graham Bird, World Economics, March 2002
In the midst of a lively debate about international monetary reform at the beginning of the twenty-first century, there seemed to be a broad consensus about exchange rate policy in developing and emerging economies; that they should opt for one of the extremes in the form of either firm fixity or free flexibility. Intermediate solutions were ruled out. However, dissenting voices remained and have become more audible. This paper reviews the underlying theoretical issues and draws on case study experience to see whether clear conclusions emerge. The investigation shows that the choice of exchange rate regime continues to involve a careful weighing up of opposing arguments. It may therefore be unwise for the IMF to adopt the ‘consensus’ view. A more subtle made-to-measure approach is needed.
Is Dollarisation a Viable Option for Latin America?
Graham Bird, World Economics, March 2001
In the aftermath of the East Asian financial crisis there has been much discussion of exchange rate policy in developing countries. Some observers have suggested that they should opt either for flexible exchange rates or for firmly fixed rates. Adopting the US dollar as legal tender and abandoning the domestic currency is one possibility. In conditions of economic crisis Ecuador dollarised in early 2000. Will other Latin American economies follow or will Ecuador live to regret the decision? This article assesses the arguments.