Policy imbalances and the uneven recovery john b taylor
Sponsored Links
This presentation is the property of its rightful owner.
1 / 30

Policy Imbalances and the Uneven Recovery John B. Taylor PowerPoint PPT Presentation

  • Uploaded on
  • Presentation posted in: General

Policy Imbalances and the Uneven Recovery John B. Taylor. Conference on The Uneven Recovery: Emerging Markets versus Developed Economies Oct 14, 2011 . Two Global Imbalances. Current account imbalances Monetary imbalances

Download Presentation

Policy Imbalances and the Uneven Recovery John B. Taylor

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript

Policy Imbalances and the Uneven Recovery John B. Taylor

Conference on The Uneven Recovery:

Emerging Markets versus Developed Economies

Oct 14, 2011

Two Global Imbalances

  • Current account imbalances

  • Monetary imbalances

  • Both relevant for emerging markets versus developed economies

  • We hear much about the first

  • But the second may be more important

Current Account Imbalances

  • A frequent topic for international coordination

  • A perennial topic for G-20, IMF, OECD (WP3)

  • Sometimes used for calls by USand Europe for exchange rate changes by EME

  • Frequently blamed for the financial crisis

    • Saving glut flows into US, lowers interest rates

    • Alternative to the “too low for two long” view

  • Now “rebalancing” is a major focus of the G-7, G-20, IMF

Link to Saving-Investment Gap

Saving – Investment =Net Exports


Y-C-G= I+X



Look at recent history

United States

C/Y and G/Y

Source: Borio and Disyatat (2011)

Capital Flows and the Current Account

Consider 2004(Billions of dollars)

Exports of goods and services and income receipts 1531

Imports of goods and services and income payments -2118

Unilateral current transfers -81

Current Account Deficit -668

U.S. Owned Assets Abroad -856

Foreign Owned Assets in the United States 1440

Statistical discrepancy & other reconciliations 84

Note that these are

capital flows

Not capital stocks

U.S.GDP was $11734 billion in 2004, so

CA was 5.7 percent as a share of GDP



The connection between current

account and change in official

reserves can be particularly weak

Current account =

Change in official reserves

+ other gross outflows

- other gross inflows

United States

Mainly Europe rather than emerging markets

If not the current account, thenwhat is driving these flows?

  • Monetary policy

  • Exchange rate policy

Clear Evidence from a Very Transparent Central Bank

  • Norges Bank very explicit and transparent in accounting for how external variables affect interest rate path

  • Useful to consider several episodes in past few years

  • Reveals foreign interest rate as the most significant reason for deviating from basic rule





Policy rate in 1/2008 (with fan chart) and theincrease in the policy rate in 2/2008 (red line)

Source: Norges Bank

Higher demand in Norway

Higher inflation in Norway

Higher interest rates abroad and developments in the foreign exchange market

Lower growth abroad

Higher risk premium in the money market

Factors behind changes in the interest rate path from 1/2008 to 2/2008

From 1-10

  • From Øistein Røisland

  • “Monetary Policy in Norway”

From MPR 1/10

From OECD Survey Norway, 2010

Empirical evidence that target interest rate in

EM central banks responds to exchange rates

Example from Sebastian Edwards (2005) “The Relationship

Between Exchange Rates and Inflation Targeting Revisited”

Continued from Sebastian Edwards (2005)

Example from ECB during 2000-2006

  • Sample 2000.1 - 2006.4.

  • Inflation = 4-quarter rate of change in the harmonized index of consumer prices

  • GDP gap = % deviation of real GDP from trend.

  • Regress deviation of ECB rate from Taylor rule on federal funds rate.

  • Estimated coefficient = .21

    • standard error of .06.

    • Plot of the actual and fitted values from this regression:

Illustrative Chart from the OECD, March 2008

The Case of the Uneven Recovery

  • Very low policy rate in US

  • Creates pressures on EM central banks to hold rates lower than they would be for domestic price and output stability

    • Also creates pressures to intervene in currency markets and impose capital controls

  • Leads to higher inflation, and perhaps more crises

  • So need to have “monetary rebalancing”

  • But little interest from developing countries

General Sources of Instability

Consider two country model withiaffecting i* Interest rates are set according to:

Solving for the interest rates results in the following


  • Need to focus more on “monetary rebalancing”

    • Side by side discussion with “current account rebalancing”

  • May be more important than current account rebalancing

  • But how?

    • More global leadership

    • Global inflation target

  • Login