Global Growth, Current Account Imbalances and Exchange Rates. Kenneth Rogoff, Harvard University. Pedro Barrie Lectures (3) November 22, 2005 Vigo, Spain. We take up one piece of adjustment: Asian exchange rates. We focus on China, which today is the lynchpin of the system.
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Kenneth Rogoff, Harvard University
Pedro Barrie Lectures (3)
November 22, 2005
Intermediate exchange rate regimes – where some exchange rate movements are permitted but extreme volatility is avoided– are already most popular. In 1975, almost 2/3s of all countries had a pegged exchange rate. Today, almost 2/3s of all countries have an intermediate regime. Likely many more by 2020.
Few countries have pure floats (euro-dollar, pound dollar, Austrialian dollar and South African Rand are examples of pure floats.)
Recent move to greater flexibility is both necessary and desirable.
Over long term, as China’s financial markets develop and as trade expands, fixed exchange rate is not a viable option if China wants to retain any autonomy over its own monetary policy
(In 1992, over 40 countries had inflation over 40%. Today, only Zimbabwe does. Even the Republic of the Congo has single digit inflation now.)
Probably, but not simple. Current upward pressure on yuan is driven not only by trade balance surplus, but by capital inflows. Capital controls are assymmetric; money can get in more easily than it can get out. If controls were symmetric, pressure might be downwards.
Euro Area $3.58
United States $3.06
The rate of growth in China’s trade has been typical of countries after economic liberalization (the following graphs dates China’s economic liberalization from 1979, and looks at trade growth versus years from liberalization.
China’s Opening Up--Real Export Growth countries after economic liberalization (the following graphs dates China’s economic liberalization from 1979, and looks at trade growth versus years from liberalization.
(Log of exports divided by U.S. GDP deflator; beginning period = 1)
BUT REAL EXCHANGE RATE PICTURE IS QUITE ATYPICAL. China’s real exchange rate (inflation adjusted exchange rate) has moved in the opposite direction as Japan’s did post liberalization.
China’s Opening Up--Exchange Rate real exchange rate (inflation adjusted exchange rate) has moved in the opposite direction as Japan’s did post liberalization.
(Log real exchange rate, beginning period = 1)
Solid line: Real exchange rate
Dashed line: Real effective exchange rate
External Debt Defaults in Emerging Markets financial crises are difficult to avoid entirely.
An Early History of Default financial crises are difficult to avoid entirely.
Number of defaults
Current situation where United States is absorbing 3/4s of global savings cannot be “ideal”
Poor developing countries should not be paying for profligacy in the world’s richest country.
“Exchange Rate Durability and Performance in Developing versus Advanced Economies,” (with A. Husain and A. Mody) Journal of Monetary Economics 52 (Jan. 2005), 3
"The Modern History of Exchange Rate Arrangements: A Reinterpretation," (with C. M. Reinhart) Quarterly Journal of Economics 119(1) Feb. 2004.
Evolution and Performance of Exchange Rates Regimes, (with A. Husain, A. Mody, R. Brooks, and N. Oomes), IMF Occasional Paper 229, 2004.
The Effects of Financial Globalization on Developing Countries: Some Empirical Evidence (with E. Prasad, S. Wei and A. Kose), IMF Occasional Paper 220, 200
Exchange Rate Regimes and Growth, with P. Aghion, P. Bacchetta, and R. Ranciere