Transcript On Decoupling and the China Connection

On Decoupling and the China
Connection
Pablo García
Juan Pablo Medina
Central Bank of Chile
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IDB - XXVII Meeting of Latam Network of CB and FM
May 9th de 2008
Motivation
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Facts:
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Are these independent or related developments?
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Increased trade and financial integration across regions of
the world, rise of Asian giants
Sharp increase in commodity prices
Apparent decoupling of emerging economies (EME) from
developed economies (DE) current credit cycle
Decoupling results from differing medium term prospects
between EME and DE? Or from transmission of lax monetary
policy in DE to pegged EME?
Commodity prices and EME performance, cause or effect?
Can these facts result from a single shock to DE?
What role for the unwinding of global imbalances?
IDB - XXVII Meeting of Latam Network of CB and FM
May 9th de 2008
What we do
DSGE model of the global economy
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Four economic zones: US, EU, AS, RW
Each produces differentiated traded and non traded goods
Using labor and two commodities: OIL and COPPER
RW has a commodity intensive endowment
AS is commodity intensive in production
Trade interlinkages
Standard features: price and wage rigidities, taylor rules, etc…
Model is subject to shocks
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US slowdown
Monetary policy relaxation in US
Increased labor supply in AS
Weakening of the currency in AS
IDB - XXVII Meeting of Latam Network of CB and FM
May 9th de 2008
US productivity slowdown
US
EU
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AS
RW
0.1
0.2
0.4
0
0
0.2
-0.1
-0.2
0
-0.2
-0.4
-0.2
0
va
-1
nx
-2
-3
0
10
20
-0.3
0
10
US
20
0.1
0.1
0.2
0
0
0
-0.1
-0.1
0
10
Po y Ps
20
-0.2
0
10
RER: EU
10
po
ps
5
20
pic
1
20
10
RW
0.4
0.2
10
-0.4
0
0.2
Rn
0
0
20
0.6
0.3
2
10
AS
EU
3
-0.6
0
20
-0.2
0
10
RER: AS
20
RER: RW
0
0.5
0
-0.5
0
-0.5
-1
-0.5
-1
-1.5
-1
-1.5
0
-5
0
4
10
20
-2
0
5
10
15
20
-1.5
0
5
10
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-2
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Results of simulations (I)
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US slowndown driven by demand contraction:
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US slowndown driven by productivity contraction:
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Standard and expected implications on monetary policy and real
exchange rates
Increase in US net exports, decrease in EU, AS, RW net exports
No decoupling: global slowdown and disinflation across the board
(including commodity prices)
BUT: producer currency pricing in EU but not in AS or RW implies
real impact is felt first in EU and a delayed impact in AS and RW
Some similarities on next exports dynamics
BUT significant decoupling in the short term: higher marginal costs
in US, economic expansions especially in AS, rise in inflation and
commodity prices across the world
Eventually, tighter monetary policies and global slowdown
AS and EU more cyclically sensitive, RW shows more stable growth
dynamics
IDB - XXVII Meeting of Latam Network of CB and FM
May 9th de 2008
Results of simulations (II)
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Monetary policy relaxation in US:
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Increased AS labor supply:
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Expected implications on AS, EU, RW real exchange rates and net
exports
Beggar-thy-neighbour effect on regional growth, with regional
subsequent disinflation
Higher commodity prices in the short run
Lowers AS unit labor costs and leads to lower inflation and easier
monetary policy across the board
Significant increase in commodity prices
Dutch disease in RW: appreciation leads to lower net exports and
lower growth
IDB - XXVII Meeting of Latam Network of CB and FM
May 9th de 2008
Results of simulations (III)
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Monetary policy relaxation in AS:
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Expected implications on US, EU, RW real exchange rates and net
exports
Beggar-thy-neighbour effect on regional growth, with subsequent
implications on regional disinflation
Higher commodity prices in the short run and moderate Dutch
disease impact
IDB - XXVII Meeting of Latam Network of CB and FM
May 9th de 2008
Conclusions
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Can a single shock explain decoupling and global inflation?
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However, we could be observing short term decoupling
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Interaction of pricing and pegged exchange rates to the US
Good news on the inflation front
But bad news on growth prospects for AS and RW going forward
Further integration of Asia in the global economy (eg. enhanced
global labor supply)
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Yes: US slowdown in productivity
Bleak medium term implications: tighter monetary policy to contain
inflation across the globe
Back to the 1970’s?
Good for global inflation
Good news with a challenge for commodity exporters
IDB - XXVII Meeting of Latam Network of CB and FM
May 9th de 2008
On Decoupling and the China
Connection
Pablo García
Juan Pablo Medina
Central Bank of Chile
9
IDB - XXVII Meeting of Latam Network of CB and FM
May 9th de 2008
Desaceleración de la dda. de US
US
EU
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0
1
-0.1
0
-0.2
AS
RW
0
0
-0.2
-0.2
-0.4
-0.4
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va
-0.3
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nx
-0.4
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10
20
-0.5
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US
-0.6
-0.6
10
20
-0.8
-0.8
0
10
EU
0
20
-1
0
10
AS
0
20
RW
0
0
-0.5
-0.5
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-1
-0.2
-1
-0.4
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-2
Rn
-0.8
-3
0
10
20
-1
0
Po y Ps
pic
10
20
-1.5
0
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RER: EU
5
0
0
-2
-4
ps
10
-2
po
10
20
2
-2
-10
0
10
RER: RW
2
0
-5
-1.5
0
RER: AS
2
0
20
20
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0
-4
10
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Incremento empleo AS
US
EU
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AS
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va
nx
0.1
RW
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0.2
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2
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0
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US
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Rn
pic
10
20
RW
0
0.05
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AS
EU
0.05
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0
-0.1
0.5
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0
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-0.05
0
10
20
-0.05
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Po y Ps
15
-4
0
10
20
ps
5
10
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0
RER: AS
0.09
2
0.08
1
10
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RER: RW
-0.5
po
10
11
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RER: EU
20
0
0
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0.07
0.06
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Comentarios finales
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Herramienta complementaria para contribuir a la
elaboración de escenarios de riesgo internacional
IDB - XXVII Meeting of Latam Network of CB and FM
May 9th de 2008