Transcript International Coordination

International Coordination
Jeffrey Frankel
Harpel Professor of Capital Formation and Growth
Harvard Kennedy School
2015 Asia Economic Policy Conference
Policy Challenges in a Diverging Global Economy
Federal Reserve Bank of San Francisco
November 19-20, 2015
Calls for international macroeconomic
policy coordination are back
• after a 30-year absence.
• Origins in scholarship:
Cooper (1969) and Hamada (1976).
• Heyday of coordination in practice:
the decade 1978-1987,
– from the Bonn Summit to the Louvre Accord.
Calls for international macroeconomic policy coordination are back
• Coordination then fell out of favor.
– Historically,
• The Germans, in particular, regretted what they had agreed
at the Bonn Summit: reflation turned out to be the wrong
objective in the inflation-plagued late 1970s.
• Most summit communiques had little effect,
– for better or worse.
• Another problem: the structure of the G-7 did not allow a
role for EM countries.
– Skeptic scholars: Oudiz & Sachs (1984), Rogoff (1985),
Tabellini (1990), Kehoe (1987), Feldstein (1988), Fischer
(1988), Frankel (1988), Ghosh & Masson (1988).
The return of international policy coordination
• G-20 leaders summits
– 1st summits: DC, Nov. 2008, & London, April 2009,
– to deal with GFC.
• Agreements to refrain from competitive depreciation
– Ceasefire, G-7 ministers in February 2013
– Side agreement to TPP, November 2015.
• EM calls for FRB to coordinate,
– after “taper tantrum” of 2013 –
– RBI Gov. Rajan: “International monetary cooperation has
broken down…The U.S. should worry about the effects of its
policies on the rest of the world” (1/30/14).
The return of international policy coordination
• This time the issues go by names like
– currency wars,
– taper tantrums,
– and fiscal compacts.
• Some scholars have returned to the subject:
– E.g., Blanchard, Ostry & Ghosh (2013), Ostry & Ghosh
(2013), Subacchi & Van den Noord (2012), Taylor (2013) and
Engel (2014, 2015).
– And to the question whether floating exchange rates
insulate: Rey (2015)…
Outline
• Four possible frameworks for proposals to coordinate
fiscal or monetary policy:
1)
2)
3)
4)
the locomotive game (“exporting unemployment”),
the discipline game (moral hazard),
the competitive depreciation game (“currency war”)
and the competitive appreciation game (“exporting inflation”).
• The paper also considers
– claims that monetary coordination has been made necessary by
the loss of the short-term interest rate instrument.
• Proposals for the direction of coordination vary widely,
– due to different models and
– different domestic interests.
– These differences weaken the calls for coordination
• which can deflect attention from dealing with important domestic issues.
FISCAL POLICY
1) The locomotive game
(as seen, esp., by US):
When cooperation means joint expansion
Historical examples:
• G-7 London Summit, 1977; Bonn Summit, 1978
– to promote recovery from 1975 recession.
• G-20 leaders’ summit in London, April 2009
– to deal with GFC.
• G-20 meeting in Brisbane, November 2014
– after a new slowing of global growth.
– It agreed to “strengthen policy cooperation,”
including to “boost demand and jobs.”
When cooperation means joint expansion
Table 1: The locomotive game
US pursues
contractionary fiscal
policy
Europe
Non-cooperative
pursues
“beggar-thy-neighbor”
contractionary equilibrium: global
fiscal policy recession.
US pursues expansionary
fiscal policy
Europe
pursues
expansionary
fiscal policy
Cooperative “locomotive”
outcome: nobody achieves
a trade surplus, but higher
spending lifts all boats.
Europe complains, on
behalf of its exporters
and import-competing
firms.
US runs trade deficit;
complains on behalf of its
exporters and importcompeting firms.
Figure 1: The locomotive game
= US
spending
•
•
= German spending
But that’s not how the Germans see it…
2) The discipline game
When cooperation means joint fiscal rectitude
In their view,
• Fiscal expansion is not expansionary. E.g., AS is vertical.
• And one country’s fiscal expansion is a negative
externality, not a positive one:
– competing for funds in global marketplace
• e.g., Chang (1990);
– or gambling on bailout in the event of fiscal crisis
• E.g., from IMF
• or fellow members of a European Monetary Union
– e.g., Glick and Hutchison (1993), Aizenman (1998).
For that matter, it’s not how US congressional Republicans
see it either.
Table 2: The discipline game
(moral hazard):
When cooperation means joint fiscal rectitude
Germany
runs
budget
surplus
Germany
runs
budget
deficit
Other euro member
runs budget surplus
Other euro member runs
budget deficit
Cooperative agreement
on fiscal rules, to
eliminate moral hazard.
Germans fear that they will
have to bail out the other
member.
Other member fears it
will have to bail out
Germany.
Uncoordinated equilibrium:
Everyone runs excessive
deficits because of moral
hazard from possible bailouts.
Figure 2: The discipline game
= spending
of US, or
of euro
partners
•
•
= German spending
MONETARY POLICY
(3) The competitive depreciation game
or “Currency Wars”
Historical examples
• Competitive devaluations in the 1930s, esp. FDR
dropping out of London Monetary Conference of 1933 –
– as seen by Europe at the time and historians.
• China currency manipulation, as seen by US politicians.
– 2003-13, when PBoC bought dollars
– and even 2014-15, when it has been selling dollars.
• US QE2, 2010-11 – as seen by Brazilian leaders.
• Japan’s QQE (Abenomics), 2012-13 – as seen by US.
• ECB QE, 2014-15.
“Currency wars”
• Brazilian complaints:
– Finance Minister Guido Mantega, 2010: “We’re in
the midst of an international currency war, a
general weakening of currency. This threatens us
because it takes away our competitiveness”
(9/27/2010).
– President Dilma Rousseff continued the currency
war accusation, criticizing QE by the US and other
advanced countries as a “monetary tsunami” that
had detrimental effects via the exchange rate
(April 2012).
Table 3a: The competitive depreciation game
(currency wars):
When cooperation means keeping interest rates high
Other country
tightens
monetary
policy
Other country
expands
monetary
policy
US pursues
contractionary
monetary policy
Superior cooperative
equilibrium: all agree
to refrain from
currency warfare.
Dollar appreciates.
US complains, on
behalf of its exporters.
US pursues expansionary
monetary policy
Dollar depreciates.
Trading partners complain,
on behalf of their exporters .
“Currency war” noncooperative outcome:
said to be bad for all,
because none achieves depreciation & trade stimulus.
Examples of cooperative agreements to prevent
competitive depreciation
• Rules to avoid currency wars by requiring floating.
– IMF’s 1977 Surveillance Decision & Article IV (3.1), 1978:
each member shall “avoid manipulating exchange rates…to prevent
effective balance of payments adjustment…“
– “G-7 ceasefire in the currency war,” February 2013
“We, the G7 Ministers and Governors, reaffirm our longstanding
commitment to market determined exchange rates… [O]ur fiscal and
monetary policies have been and will remain oriented towards meeting
our respective domestic objectives using domestic instruments.”
– Side-agreement to TPP, November 2015.
– Proposals to go further, to put currency manipulation rules
into trade agreements, backed up by trade sanctions.
• e.g., Bergsten (2013, 2015a) and Gagnon (2012, 2013).
Doubts about the currency wars paradigm:
• Revisionist view of 1930s competitive devaluations
– Eichengreen-Sachs (1985, 1986); Eichengreen (2015).
– When all devalued against gold, money became easier,
which is just what was needed.
• Monetary easing ≠ currency manipulation.
– It isn’t even clear whether effect on TB >0 or <0:
• Spending effect offsets normal effect via exchange rate.
• E.g., Blanchard, Ostry, Ghosh & Chamon (2015).
– Would EMs really have wanted G-7 CBs to refrain from
fighting the 2008-09 recession?
Floating lets each choose its own monetary stance.
• Asymmetries in appropriate stance
– Brazil in 2010 had excess demand, calling for a higher
interest rate than in the US.
• It’s natural for capital to flow US → Brazil
and for the real to appreciate.
• Brazil’s tradable sector was unhappy. But half the problem was
too-high government spending; there is no reason why the
interest rate-sensitive sector should bear all the crowding-out,
rather than sharing it with the exchange-rate-sensitive sector.
– The situation has run in reverse recently.
• US economic strength led to taper tantrum/end of QE in 2013,
• and expectations of Fed lift-off in 2015.
• Capital flows from EMs → US and the $ appreciates.
– Floating allows maximum monetary independence.
Floating lets each choose its own monetary stance.
• The arguments for maximizing independence
via floating
– Economic: to suit local conditions.
– Political economy (Friedman, 1953): locate decisionmaking where the political accountability lies.
Claims that monetary coordination
has now been made necessary by the loss of
the short-term interest rate instrument i:
• among advanced countries -- due to ZLB.
– ZLB & coordination: Chinn (2013), Engel (2014), Portes (2014),
Caballero, Farhi & Gourinchas (2015), Devereux & Yetman (2013).
– If i were the only domestic monetary instrument,
then its loss would leave only the exchange rate
and would thus turn monetary policy into a zero-sum game.
– But there are other domestic monetary channels:
• long-term interest rates, corporate interest rates, equity prices,
real estate prices and the credit channel.
• which can be influenced by Unconventional Monetary Policy
• and reinforced by a positive inflation target.
• among EMEs -- due to finicky financial markets. (More below.)
Some claim that EMEs are in practice not able to set i
independently, even if they float.
• Rey (2014) and Agrippino & Rey (2014) argue that floating
does not give insulation, challenging the Trilemma.
– Floating has not been sufficient to insulate against financial
shocks
• originating in US interest rates
• or in investor risk attitudes.
– Especially for EMEs.
• In some recent models, capital market imperfections may
prevent floating rates from performing the shock absorber
role claimed in traditional macroeconomic analysis.
– E.g., Farhi & Werning (2014).
• But there is empirical evidence that exchange rate
flexibility does give some monetary independence
–
–
–
–
Di Giovanni & Shambaugh (2008),
Aizenman, Chinn & Ito (2010, 2011),
Klein & Shambaugh (2013);
Obstfeld (2015).
• The question for coordination is whether the big players
like the United States , the eurozone, or China would set
macroeconomic policies very differently if they were
taking into account the interests of other countries than
they do in the pursuit of their own economic interest.
– Even if one thinks the 2008 GFC or the 2010 EZ crisis can be
attributed to mistakes by the respective policy-makers, it
hardly helps to tell them to improve their own economies
for the sake of the rest of the world.
(4) The competitive appreciation game
• EMEs fear that US monetary policy is too tight, putting
downward pressure on non-$ currencies.
• E.g., in the aftermath of the 2013 “taper tantrum,”
RBI Governor Rajan was provoked to complain: “Central banks
should assess spillover effects from their own actions…For example,
this would mean that while exiting from unconventional policies,
central banks would pay attention to conditions in emerging markets…”
-- 4/10/2014.
• Precedents:
– Precipitation of EM crises:
• Volcker tightening led to the international debt crisis of 1982
• and the 1994 Greenspan tightening led to Mexico’s peso crisis.
– Response to crises: Simultaneous interest rate reductions
• 1987 (post stock market crash),
• 1998 (post Asia crisis), and
• 2009 (post Global Financial Crisis).
Another precedent among advanced countries
• Early 1980s: High US interest rates => a strong dollar.
• One view was that it represented competitive appreciation:
• US policy mix exported CPI inflation to other countries.
• Sachs (1985).
• In any case, the $ provoked complaints among trading
partners and in 1985 led to one of the most renowned
coordination agreements:
– the Plaza Accord,
• in which G5 ministers agreed to bring the dollar down.
• 30th anniversary this year.
– Cooperation meant fx intervention to depreciation the $
• whereas today it seems to mean refraining from intervention.
Table 4: The competitive appreciation game
(exporting inflation)
When cooperation means keeping interest rates low
US raises interest rates
Other country Non-cooperative
raises interest equilibrium:
rates
High interest rates
everywhere. The world
is stuck in recession.
Other country Dollar appreciates,
keeps interest lowering US CPI inflation
rates low
at the expense of other
countries
US keeps interestrates low
Dollar depreciates, raising
US CPI inflation
Cooperative equilibrium:
Low interest rates
everywhere. Exchange
rates unchanged, but
growth is sustained.
To summarize, differences in perceptions and
domestic politics are as big as the difference between
cooperation and non-cooperation.
• Who was right about the 1933 London Monetary
Conference?
– FDR or the Europeans?
• Who was right about the 1977-78 locomotive proposal?
– The US or Germany?
• Which is the negative externality in the eurozone:
– fiscal austerity or fiscal irresponsibility?
• Which has a negative spillover on EMEs:
– when the US eases money (2010) or tightens (2015)?
Disagreement as to the nature of the spillover effect
and the direction desirable proposals wreaks havoc
with the whole idea of coordination.
• 1st , if countries disagree on the model, the officials might
not even be able to carry on a coherent discussion of the
potential gains from coordination and how to achieve them.
– Think of the negotiations between the new Greek government in
January 2015 and its euro partners.
– The precedent of cooperation in other areas suggests that a common
model may be a pre-requisite: Cooper (2001).
• 2nd , even if negotiators come up with a coordinated package of
policIes that each believes will leave them better off – which
technically they can, though they don’t understand why the
other side wants to make the deal – it could make things worse.
– Frankel & Rockett (1998).
Concluding thoughts
• Regular meetings of officials (within reason!) are useful.
– Consultation, to minimize surprises.
– Perhaps they can narrow differences in perceptions.
– But each country has an incentive to claim to believe in
whatever model suits its interest in the bargaining process
• Ostry & Ghosh (2015).
– Officials may come increasingly to believe the models that suit
their claims
• – “cognitive dissonance.”
• Calls for international coordination are sometimes less
useful,
– when they blame foreigners to distract attention from
domestic constraints and disagreements.
Examples where calls for coordination distract:
• In 2010, Brazil’s budget deficit was too large and the
economy overheated.
– Domestic demand was going to be crowded out one way
or another,
• if not via currency appreciation, then via higher interest rates.
– When Brazilian officials blamed the US and others for
a strong real, it may have obscured the problem.
• In 2015, US wages continue to stagnate.
– Politicians’ efforts to ban currency manipulation in trade
agreements are scapegoating Asians rather than dealing
with the problem.
International Coordination
Jeffrey Frankel
2015 Asia Economic Policy Conference
Federal Reserve Bank of San Francisco
November 19-20, 2015