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Global imbalances and exchange rates Jomo Kwame Sundaram 26 January 2010

Global imbalances and exchange rates Jomo Kwame Sundaram 26 January 2010. Global imbalances grow. USD bn. 1000. Latin America. Other industrialised. 800. Other Asia. China. 600. Japan. 400. Oil exporters. 200. 0. -200. -400. United States. -600. -800. Euro Area.

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Global imbalances and exchange rates Jomo Kwame Sundaram 26 January 2010

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  1. Global imbalancesand exchange ratesJomo Kwame Sundaram26 January 2010

  2. Global imbalances grow USD bn 1000 Latin America Other industrialised 800 Other Asia China 600 Japan 400 Oil exporters 200 0 . -200 -400 United States -600 -800 Euro Area Central and Eastern -1000 Europe 90 91 92 93 9495 9697 98 99 00 01 02 03 0405 06 07 2

  3. World trade collapse 3

  4. South exports fall more Source: CPB

  5. Mineral prices fell more

  6. Imbalances narrow 6

  7. ST real interest rates Negative Rates 7

  8. US Fed LT rates 8

  9. Easy liquidity 9

  10. Net transfer of financial resources from South to North

  11. Net capital importers 11

  12. Capital inflows contract

  13. Bretton Woods vs Keynes • Dollar-gold parity ($35/oz.) • Permanent US current account deficit possible • Seigneurage income • Vietnam  Run on Eurodollars  1971 • End of BW system  • ‘Non-system’: IMF Interim Committee • Rise of Japan  Plaza 2  endaka • Drucker: X border flows; K acct liberalization • Rise of China  exchange rates, SWF

  14. EA miracle + X rates • EP con EP: ISI + EOI; scale economies • Undervalued X rates since postwar Japan • SEA mid-80s devaluations + endaka • Unlike NEA, SEA FDI-dependent • Finance dominant, oppose $ appreciation post-1995 end of endaka 1997-98 crisis

  15. China boom + X rates • 1994 RMB ‘devaluation’ • Contract manufacturing: learning by doing • End of TVEs boom  scale economies • Productivity gains + Lewisian L market  consumer price deflation + high growth • China super-competitive • Big overall trade surplus  reserves accumulation from mid-2000s • $3trn USD assets, including >$1trn US T bonds • China cannot afford massive $ depreciation • Japanese endaka  end of Japanese miracle

  16. Self-protection • 1990s’ LA, EA crises  accumulate reserves - no lender of last resort - onerous IMF conditionalities • No insurance element

  17. Crisis + reserves Financial positions stronger than during Asian + LA crises (more foreign reserves, ‘better’ fiscal balances) But reserves rapidly evaporated with export collapse; fiscal space also diminished IMF late ‘09 paper (Blanchard, et al.): Reserve accumulation did not help in crisis 17

  18. Thank you Please visit IDEAs www.networkideas.org UN-DESA esa.un.org and G24 www.g24.org websites Research papers Policy briefs Other documents 18

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