TARGET balances, Bretton Woods, and the Great Depression
Michael Bordo, 21 March 2014
Since 2007, there has been a buildup of TARGET imbalances within the Eurosystem – growing liabilities of national central banks in the periphery matched by growing claims of central banks in the core. This column argues that, rather than signalling the collapse of the monetary system – as was the case for Bretton Woods between 1968 and 1971 – these TARGET imbalances represent a successful institutional innovation that prevented a repeat of the US payments crisis of 1933.
During the Eurozone crisis, an analogy was made between the events in Europe between 2007 and 2012 and the collapse of the Bretton Woods System between 1968 and 1971. There has been a build-up of TARGET liabilities since 2007 by some central banks (notably Greece, Ireland, Portugal, and Spain, or the ‘GIPS’), and of TARGET assets by Germany and others.
Topics: Economic history, International finance
Tags: Bretton Woods, Central Banks, ECB, euro, Eurosystem, eurozone, Eurozone crisis, financial crisis, global imbalances, Great Depression, TARGET
Tracking the causes of Eurozone external imbalances: New evidence
Jose Luis Diaz Sanchez, Aristomene Varoudakis, 6 February 2014
External imbalances within the Eurozone grew substantially between the introduction of the euro in 1999 and the global financial crisis of 2008–09. Using new empirical evidence, this column argues that imbalances in the Eurozone periphery were mainly driven by a domestic demand boom, triggered by greater financial integration, with changes in the periphery’s competitiveness playing only a minor role. Internal devaluation may thus have been of limited effectiveness in restoring external balances, although better external competitiveness may eventually boost medium-term growth.
The Eurozone sovereign debt crisis, triggered by the 2008–09 global financial crisis, exposed macroeconomic imbalances in member countries that had accrued gradually following the advent of the euro in 1999.
Topics: International finance
Tags: competitiveness, European sovereign debt crisis, eurozone, global financial crisis, global imbalances
China's growth, stability, and use of international reserves
Joshua Aizenman, Yothin Jinjarak, Nancy P. Marion, 5 January 2014
Before the financial crisis, the world economy was characterised by large and growing current account imbalances. Since the onset of the crisis, the current account imbalances of the US and China have decreased to half their pre-crisis levels. This column highlights the implications of the reduction in the current account surplus for China, and gives policy recommendations. A restructuring of the economy is needed, and reversing of policies that depress consumption and prevent real appreciation.
Topics: Global crisis
Tags: China, global crisis, global imbalances, US
Global and Eurozone imbalances: A question of civic capital?
Sascha Bützer, Christina Jordan, Livio Stracca, 23 November 2013
Since the advent of the Eurozone sovereign-debt crisis, economic commentators have drawn attention to macroeconomic imbalances within the Eurozone. This column presents evidence on the link between macroeconomic imbalances and differences in culture – or more specifically, interpersonal trust. A conservative estimatation suggests that a one standard-deviation increase in trust reduces macroeconomic imbalances by about a quarter of a standard deviation. Moreover, differences in interpersonal trust can explain a fifth of the variation in intra-Eurozone imbalances.
Macroeconomic imbalances have been the subject of much debate in recent years, and are still in the spotlight. Before and during the financial crisis, a lot of attention was devoted to global imbalances – in particular to the persistent current-account deficits of some countries (such as the US) and the persistent surpluses of others (such as China).
Topics: Europe's nations and regions, International trade
Tags: civic capital, eurozone, global imbalances, trust, World Values Survey
International cooperation and central banks
Harold James, 8 October 2013
The global nature of the recent financial crisis required a coordinated response from central banks. After the fall of Lehman Brothers, several of them simultaneously reduced their policy rates, and the Fed extended dollar swap lines to its overseas counterparts. However, the second phase of the crisis has put increasing strain on international cooperation. This column presents two explanations. First, the Eurozone crisis threatens the solvency of governments, thus creating conflict over who will pay the costs of maintaining financial stability. Second, unconventional monetary policy has had spillover effects in developing countries.
Tackling the aftermath of a major financial crisis, the origins of which lie in ‘global imbalances’ and whose transmission mechanisms are cross-national, seems prima facie to demand more substantial and institutionalised cooperation. However, in the five years since the collapse of Lehman Brothers, visions of what central banks can and should do have changed profoundly.
Topics: Global crisis, International finance
Tags: Central Banks, Eurozone crisis, global crisis, global imbalances, monetary policy, policy coordination
Value-added exchange rates
Rudolfs Bems, Robert Johnson, 6 December 2012
With the rise of complex, globalised supply chains is the real effective exchange rate (REER), the most commonly used measure of competitiveness, now outdated? If it is, what should replace it? This column presents a ‘Value-Added REER’ and shows that it differs substantially from the conventional REER. Because it is possible to construct a new Value-Added REER from existing data, policymakers interested in improving their understanding of competitiveness might well consider including it in their toolbox.
Real effective exchange rates (REERs) are widely used to gauge competitiveness. Yet conventional REERs, based on gross trade flows and consumer price indexes (CPIs), are not well suited to that role when imports are used to produce exports – i.e., with vertical specialisation in trade.
Topics: Competition policy, Global economy, International trade
Tags: China, competitiveness, Germany, global imbalances, globalisation, iPhone, supply chains, trade
Global trade in services: Fear, facts, and offshoring
J. Bradford Jensen, 19 November 2012
Should developed countries fear trade in services? Won’t high skilled jobs be lost to cheaper, developing country service workers? This column argues that trade in services represents a profitable opportunity as long as international trade in services is liberalised. The US and other developed countries should aggressively pursue fairer and thus more favourable terms under the WTO’s Government Procurement Agreement.
Should the US, or indeed the EU, Japan, Canada, or Australia, fear increased trade in services? As the ‘Really Good Friends of Services’ discussions gain momentum in Geneva, it seems an important time to ask1.
Topics: International trade
Tags: global imbalances, international trade, protectionism, WTO
Slow but steady? External adjustment within the Eurozone starts working
Marco Buti, Alessandro Turrini, 12 November 2012
Why aren’t Eurozone imbalances adjusting? This column argues that there is heartening evidence that they are. Labour markets are beginning to be reformed across Europe, thereby increasing countries’ competitiveness. However, the road ahead will surely long and hard; for external adjustment to really work, it is crucial that financial markets start to take a lead supportive role.
There is a general perception in the policy debate that Eurozone imbalances are not adjusting. Deficit countries are stuck in an unsustainable equilibrium and surplus countries’ growth is mostly based on exports. The most pressing concern is that a symmetric evolution of competitiveness between surplus and deficit countries is needed for rebalancing to be complete and durable.
Topics: EU policies, Europe's nations and regions, Financial markets, Labour markets
Tags: banking union, Eurozone crisis, financial crisis, global imbalances, Greece
Global Rebalancing 2.0
Linda Lim, Ronald U Mendoza , 24 September 2012
There has been much talk among economists of ‘global rebalancing’, with the focus on China and the US rebalancing their current accounts. But this column argues that the type of rebalancing that will bring real gains to the global economy is one that will be shaped by many countries, both industrial and developing.
The discussion on global rebalancing is at a crossroads, and much of what will shape policy options moving forward will have to be taken up in roundtables that include more countries than the two usual suspects, China and the US.
Topics: Global economy
Tags: China, global imbalances, US
Why do Chinese households save so much?
Raman Ahmed, Heleen Mees, 28 August 2012
China’s huge savings are met with both awe and suspicion. This column asks what explains the high savings rate. It uses data from 1960 to 2009 – including the periods with the most significant economic reforms.
China’s monumental savings rate is a popular topic of for policy discussion.1 It has been blamed for the global financial crisis, currency wars (Portes 2010), and the ensuing Great Recession (Mees 2012). But what explains the high savings rate?
Topics: Global economy
Tags: China, global imbalances, savings rate