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Discussion of: Crises and International Policy Coordination Sizing Official Reserves

Discussion of: Crises and International Policy Coordination Sizing Official Reserves. Gian Maria Milesi-Ferretti IMF, Research Department and CEPR. Crises and International Policy Coordination. Causes of financial turbulence Global imbalances Yen carry trade Traditional policy coordination?

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Discussion of: Crises and International Policy Coordination Sizing Official Reserves

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  1. Discussion of:Crises and International Policy CoordinationSizing Official Reserves Gian Maria Milesi-Ferretti IMF, Research Department and CEPR

  2. Crises and International Policy Coordination • Causes of financial turbulence • Global imbalances • Yen carry trade • Traditional policy coordination? • Role of coordination in supervision?

  3. A few general points • Global Imbalances • Agree that they are not the direct driver of current financial turbulence • Direct impact: portfolio shock (decline in demand for US assets--securitized debt) • Together with decline in ST interest rates, big decline in USD • Sizable correction of CA balance underway

  4. Global Imbalances (continued) • Importance of valuation changes • US has liabilities in domestic currency, assets in FX • Large USD depreciation, underperformance of US stocks imply that… • US position at end-2007 broadly similar to external position at end-2001

  5. The yen “mystery” • Broadly agree with analysis • Carry trade very profitable when implied FX volatility is very low (as it was for many years) • Not just Japanese residents investing overseas…. • …but also foreign investors limting non-equity exposure (ie, reserves) • As MP “normalizes”, reasonable pattern of portfolio diversification should resume

  6. Policy coordination • What appetite for it? • Importance of perceptions of past episodes (particularly in Asia) • Criticism of Multilateral Consultations overstated (not a standard G-7 communiqué) • Key measures in countries’ best interest

  7. Supervision and coordination • Agree that coordination of supervision key • No illusions on what can be achieved with regulation • Securitization and risk—the (presumed) advantage of securitization and much financial innovation was shifting risk to those better able to bear it

  8. Emerging markets • Stronger net external position • Reduced FX exposure • Only “traditional” EM region: emerging Europe (growth, CA deficits). Importance for euro area performance for vulnerabilities

  9. Discussion of “Sizing official reserves” • Dramatic increase in stock of FX reserves in many EMs • Change in the composition of K-inflows to EMs – increase in portfolio equity flows (and FDI) • Validity of traditional indicators of reserve coverage: changing nature of vulnerabilities/risks?

  10. Increasing stock of reserves….

  11. Falling external debt…..

  12. Equitization?

  13. Role of FDI…

  14. Some general points on reserve coverage • Openness up significantly…but a lot of trade is in intermediates (inputs for re-export) • Comparing FX to (total liab – FDI) is extreme • It may require EMs to be creditors (there are increasing “private” holdings of foreign assets) • Currency risk characteristics of portfolio equity very different from ST for. curr. debt

  15. Reserves increasing, but foreign assets of EMs take other forms as well

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