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The Revived Bretton Woods hypothesis (BW II) . First Presentation by Michael Bürscher Supervisor: a.Univ.Prof. Dr. Martin Riese WS 2008/09. by Dooley, Folkerts-Landau and Garber „today's international financial system is similar to the Bretton Woods system„.
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The Revived Bretton Woods hypothesis (BW II) First Presentation by Michael BürscherSupervisor: a.Univ.Prof. Dr. Martin RieseWS 2008/09
by Dooley, Folkerts-Landau and Garber „today's international financial system is similar to the Bretton Woods system„ The Revived Bretton Woods hypothesis (BW II)
Bretton Woods I The Revived Bretton Woods hypothesis (BW II) Export Led Growth Criticism of the BW II hypothesis Outlook Structure
International monetary regime (WW II – early 1970s) “pegged rate” or “adjustable peg” currency regime hegemonic monetary regime centred on the Dollar center-periphery system Bretton Woods I
Bretton Woods I • Periphery Countries (Europe - Japan) • Undervalued exchange rates • (Dollar-) Reserve accumulation • Use centre region (US) as financial intermediary • US-FDI in Europe/Japan
The Revived Bretton Woods hypothesis • Main points (1): • still US as centre of the system, but East Asia as the developing periphery now • EA economies are pursuing export-led growth strategies • some EA currencies fixed against US-Dollar • other EA economies limit appreciations against the Dollar
East Asian Exchange Rate Pegs (against US-$) Source: McKinnon (2004)
The Revived Bretton Woods hypothesis • Main points (2): • EA economies run huge trade surpluses with the US • huge (and rising) US current account deficit • current account surpluses in East Asia • accumulation of dollar-denominated official reserves throughout EA
Official Foreign Exchange Reserves(in million of Dollars; 1980-2004) Source: McKinnon (2004)
The Global Framework • Trade Account Region (~Asia) export-led development strategy • Capital Account Region (~Europe) private investors drive capital flows and exchange rates • Centre (United States) issues the reserve currency financial intermediary of the system
Export Led Growth • Central role in the BW-II framework • Fuel economic growth by promoting exports “Exports mean Growth”
Justifications for Export-led Growth • Lack of robust domestic demand • Innovation and technological diffusion • Attract Foreign Direct Investment (FDI) • Get foreign exchange via exports • Trade surpluses are more desired • Underemployed populations
Critique on Export-Led Growth • Reinforces dependency on industrial countries • Prevents development of domestic markets • “race to the bottom” • Relationship of ELG and financial instability--> alternative: domestic demand-led growth
Mutual Benefits of the Current System • East Asia • growth and development • creation of a competitive capital stock • foreign reserves as collateral / “insurance” • United States • Stable and low-cost funding for current account deficit • Accumulation of Dollars in EA helps to hold interest rates down • Cheap imported consumption goods --> lower inflation • Benefits also for US-firms producing in EA
Criticism of the BW II - hypothesis • Highly disputed hypothesis • e.g.: Eichengreen: “world has changed dramatically”Palley: “fundamentally different microeconomic regimes”Goldstein, Lardy: BW II framework is focused on China and other EA economies are hard to fit into the BW 2 idea
Outlook • Bretton Woods I vs. Bretton Woods II • Facts on World Trade – In Line with the BW II? • Export-Led Growth “Now and Then” • Criticism of the BW II hypothesis • The Special Role of China • Euroland's Role in All This (?) • The End of BW 2 – Even Now?