2. Global imbalances have declined…
-3
-2
-1
0
1
2
3
4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
GlobalImbalances
(percentof world GDP)
US JPN Eur surplus CHN EMA OIL ROW Eur deficit Discrepancy
3. How did the adjustment take place?
Primarily through changes in demand
US
UK
AUTBEL
DEN
FRA
GER
ITA
LUX
NLD
NOR
SWE
SWI
CAN
JPNFIN
GRE
ICE
IRE
PRT
ESP
TUR
AUS
NZE
SAF
ARG
BRACHL
COL
CRI
DR
ELS
GTM
MEX
PER
URU
CYP
ISR
LBN SLK
TAI
HKG
INDIDN
KOR
MYS PAK
PHL
SGP
THA
MOR
TUN
BLR
BLG
RUS
CHN
UKR
CZE SVK
EST
LVA
SER
HUN
LIT
CRO
SLV
POL
ROM
-.4-.2
0
.2.4
-.1 0 .1 .2 .3
change in CA balance, 2007-10
4. …and changes in output
US
UK
AUTBEL
DEN
FRAGER
ITA
LUX
NLDNORSWE
SWI
CAN
JPN
FIN GRE
ICE
IRE
PRT
ESP
TUR
AUS
NZE
SAF
ARG
BRA
CHL COL
CRI
DR
ELS
GTM
MEX
PER URU
CYP
ISR
LBN
SLK
TAI
HKG
IND
IDN
KOR
MYS PAK
PHL
SGP
THA
MOR
TUN
BLR
BLGRUS
CHN
UKR
CZE
SVK
EST
LVA
SER
HUN
LIT
CRO
SLV
POL
ROM
-.2-.1
0
.1.2.3
-.1 0 .1 .2 .3
change in CA balance, 2007-10
5. Some (weak) negative relation between
REER and CA changes for non-peggers…
US
UK
NOR
SWE
SWI
CAN
JPN
ICE
TUR
AUS
NZE
SAF
ARG
BRACHL
COL
CRI
GTM
MEX
PER
URU
ISR
SLK
IND
IDN
KOR
MYS
PAK
PHL
SGP
THA
MOR
TUN
RUS
CHN
UKR
CZE
HUN
POL
ROM
-15-10
-5
05
10
-40 -20 0 20 40
Change in REER, 2011 vs 2005-08
6. …but positive relation between CA changes
and REER changes for peggers
AUTBEL
DEN
FRAGER ITA
LUX
NLD
FIN
GRE
IRE
PRT
ESP
ELS
CYP
TAI
HKG
BLR
BLG
SVK
EST
LVA
LIT
CRO
SLV
-10
0
102030
-10 0 10 20
Change in REER, 2011 vs 2005-08
7. …so real exchange rates don’t
matter for trade balances?
Yes they do….
…but many other factors at play
Key example: terms of trade (which makes CA
and REER move in the same direction)
8. Assessing real exchange rates
Difficult to predict real exchange rates
Eminently endogenous variable, complex set
of macro, financial and trade factors
Analyzed in conjunction with external balances
(current account/capital flows, evolution of net
foreign assets)
9. Assessing real exchange rates (II)
IMF approach to exchange rate and CA
assessment
Broad bilateral/multilateral surveillance context
Quantitative assessments
Price-based (real exchange rate dynamics)
Current account balance-based (CA fundamentals and
NFA dynamics)
Now re-cast more generally in the context of
an External Stability Report
Still, very complex endeavor! Some examples:
10. Assessing REER and CA
REER-based methods (fundamentals such as
TT, NFA position, relative productivity/level of
development etc)
CA (“MB” approach, now “EBA”):
empirical relation of CA with macro, financial, and
structural determinants, plus policy variables
Assessment based on ‘desirable’values for policy
variables
ES: is the predicted CA balance consistent
with broad stabilization of the NFA position?
11. Assessing real exchange rates and the CA:
China
Large CA surplus (now considerably narrower)
Substantial reserve accumulation
(Mostly) closed capital account.
Two stories:
Export-led growth
High savings due to domestic distortions (lack of
social safety net, financial underdevelopment etc)
In both cases, REER “depreciated” and must
eventually adjust, but “centrality” of exchange
rate and need for policy adjustment different
12. Assessing real exchange rates and CA:
the United States
US CA deficit much narrower than pre-crisis…
…but still >3 percent despite sizable output gap
But REER is at close to historical minima. Hard problem!
75
85
95
105
115
125
135
FRB index
(all
currencies)
Thedollar's real effective
exchangerate
13. Assessing real exchange rates and CA:
EMs and inflows
Strong terms of trade gains in many EMs
High capital inflows, rapid growth of domestic
demand
Appreciating REER, increasing CA deficit
(despite TT gains in commodity exporters)
Both structural and cyclical elements at play in
explaining inflows, REER
Risk of reversals, impact on non-commodity
sector
14. Assessing real exchange rates and CA:
EMs and inflows (II)
Are low interest rates/QE to blame?
Weak US economy, financial turmoil in Europe
bad for everyone
US portfolio outflows much weaker in 2010-11
than pre-crisis
However, differences in degree of openness of
capital account can imply more flows channeled
to emerging economies with more open and
developed debt markets
15. Assessing real exchange rates EMs
and inflows (III)
Reversals bound to happen, essential to have
defenses
Appropriate macro stance, with room to respond
to shocks
Reserves
Avoid currency/maturity mismatches
Use macro-prudential tools and K-controls where
needed to try to lengthen maturity of inflows
16. The need for global rebalancing
Global rebalancing essential
Sustaining world growth
Liquidity trap and risks of insufficient global demand
Reducing external vulnerabilities
Legacy of crisis still with us for years to come
Multilateral approach needed
Adjustment cannot rely exclusively on demand
compression in deficit countries
17. How to go about it?
Target structural and policy distortions (macro,
financial, trade)
…but narrow trade lens inappropriate given
complexity of underlying factors
Real exchange rates need to adjust and will
adjust, whether through nominal rates or prices
Be mindful of cyclical vs structural considerations
“second-best world”
