Internal devaluations have been suggested as a possible policy option for countries in a currency union facing large external deficits. These policy actions seek to restore competitiveness by replicating the outcomes of an external devaluation. This column examines wage moderation as a potential means of internal devaluation for EZ countries. If pursued by several countries, wage moderation can work if monetary policy is not constrained by the zero lower bound, or if supported by quantitative easing. Without sufficient monetary accommodation, it will not deliver much of a boost to output, and may hurt overall EZ output.
Jörg Decressin, Prakash Loungani, 02 December 2015
Javier Cravino, Andrei Levchenko, 23 November 2015
Large exchange rate swings remain a prominent and recurring feature of the world economy. This column uses household consumption patterns to examine the distributional impact of the devaluation of the peso during Mexico’s ‘Tequila Crisis’. Cost of living increases are found to be 1.25 to 1.6 times higher for the poor compared to the rich. In the interests of equity, exchange rate policy should take account of such distributional impacts.
Exchange rates movements are again attracting a lot of attention as a focal point in the policy debate. Prolonged recession following the global financial crisis has pushed most advanced economies into liquidity traps where domestic monetary policy is severely limited. The exchange rate offers an alternative option for boosting aggregate demand in a liquidity trap. However, the exchange rate channel may have global repercussions through spillover effects on international goods and financial markets. Emerging market policymakers, in particular, have raised warnings about excessive exchange rate movements arising from advanced economy stimulus. A further risk arises from the exchange rate implications of US monetary policy `normalization’. This conference hopes to bring together new empirical and theoretical research on all aspects of exchange rates, their role in domestic macroeconomic policy as well as the global trade and financial system.
Gino Cenedese, Richard Payne, Lucio Sarno, Giorgio Valente, 17 July 2015
Various theories suggest that exchange rate fluctuations and stock returns are linked. In this column, the authors find little evidence of a relationship between the two. Thus, a simple trading strategy that invests in countries with the highest expected equity returns and shorts those with the lowest generates substantial risk-adjusted returns.
Sascha Bützer, Maurizio Michael Habib, Livio Stracca, 07 March 2015
The large dip in oil prices reverberated across asset markets, contributing to the depreciation of the Russian rouble. This column argues that the recent fall of the rouble may be more an exception than the norm. Oil shocks have only a limited impact on global exchange rate configurations, since oil exporters tend to lean against exchange rate pressures by running down or accumulating foreign exchange reserves.
Anusha Chari, Peter Blair Henry, 06 March 2015
In the wake of the Great Recession, a contentious debate has erupted over whether austerity is helpful or harmful for economic growth. This column compares the experiences of the East Asian countries – whose leaders responded to the East Asian financial crisis with expansionary fiscal policy – with those of the European periphery countries during the Great Recession. The authors argue that it was a mistake for the European periphery countries to pivot from fiscal expansion to consolidation before their economies had recovered.
Plamen Iossifov, Jiří Podpiera, 16 February 2015
The ongoing, synchronised disinflation across Europe raises the question of whether non-Eurozone EU countries are affected by the undershooting of the Eurozone inflation target, by other global factors, or by synchronised domestic, real sector developments. This column argues that falling world food and energy prices have been the main disinflationary driver. However, countries with more rigid exchange-rate regimes and/or higher shares of foreign value added in domestic demand have also been affected by disinflationary spillovers from the Eurozone.
Sebastian Edwards, 04 February 2015
The conventional ‘trilemma’ view is that countries that allow free capital flows can still pursue independent monetary policies as long as they allow flexible exchange rates. This column examines the pass-through of Federal Reserve interest rates to policy rates in Chile, Colombia, and Mexico. The author concludes that, to the extent that central banks take into account other central banks’ policies, there will be ‘policy contagion’ and that, even under flexible rates, monetary policy will not be fully independent.
Michele Ca'Zorzi, Jakub Mućk, Michał Rubaszek, 13 February 2015
Notwithstanding the progress made in the field of exchange rate economics, we still know very little of what drives major currencies. This column argues that the best that one can do is to assume that currencies move to gradually restore (relative) purchasing power parity. Contrary to widely held beliefs, this is in general a much better strategy than to just assume that the exchange rate behaves like a random walk.
Jon Danielsson, 18 January 2015
The Swiss central bank last week abandoned its euro exchange rate ceiling. This column argues that the fallout from the decision demonstrates the inherent weaknesses of the regulator-approved standard risk models used in financial institutions. These models under-forecast risk before the announcement and over-forecast risk after the announcement, getting it wrong in all states of the world.
Brian Pinto, 17 December 2014
Since the Global Crisis, concerns have grown that advanced economies are suffering from secular stagnation. This column discusses the lessons that can be learnt from the economic transition of central and eastern Europe and the emerging-market crises of the late 1990s and early 2000s. Structural reform is particularly costly in the context of a debt overhang and an overvalued exchange rate. However, the crux is not debt restructuring per se, but whether economic governance changes credibly for the better following it.
Jean-Pierre Landau, 02 December 2014
Eurozone inflation has been persistently declining for almost a year, and constantly undershooting forecasts. Building on existing research, this column explores the conjecture that low inflation in the Eurozone results from an excess demand for safe assets. If true, this conjecture would have definite policy implications. Getting out of such a ‘safety trap’ would necessitate fiscal or non-conventional monetary policies tailored to temporarily take risk away from private balance sheets.
Charles A.E. Goodhart, Philipp Erfurth, 03 November 2014
There has been a long-term downward trend in labour’s share of national income, depressing both demand and inflation, and thus prompting ever more expansionary monetary policies. This column argues that, while understandable in a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance. The authors propose policies to raise the share of equity finance in housing markets; such reforms could be extended to other sectors of the economy.
Janine Aron, John Muellbauer, 14 September 2014
Due to the adoption of inflation targeting and floating exchange rates, and the elimination of capital controls, exchange rate pass-through – the transmission of exchange rate movements to changes in the domestic price level – has become an increasingly important issue in developing and emerging market economies. This column discusses recent research on this topic, and highlights the frequent misspecifications that produce unreliable empirical estimates.
Charles Wyplosz, 12 September 2014
Last week, the ECB announced that it would begin purchasing securities backed by bank lending to households and firms. Whereas markets and the media have generally greeted this announcement with enthusiasm, this column identifies reasons for caution. Other central banks’ quantitative easing programmes have involved purchasing fixed amounts of securities according to a published schedule. In contrast, the ECB’s new policy is demand-driven, and will only be effective if it breaks the vicious circle of recession and negative credit growth.
Christian Daude, Eduardo Levy Yeyati, 01 September 2014
Central banks’ exchange rate interventions are typically attributed to precautionary, prudential, or mercantilist motives. This column documents the prevalence of an alternative motive – that of stabilising the exchange rate – in emerging markets, where, despite heavy intervention, the Global Crisis saw important deviations of the real exchange rate from its equilibrium value. Exchange rate intervention is shown to be effective, but more so at containing appreciations than depreciations.
Kris James Mitchener , Kirsten Wandschneider, 18 August 2014
The IMF has recently revised its position on capital controls, acknowledging that they may help prevent financial crises. This column examines the effects of capital controls imposed during the Great Depression. Capital controls appear not to have been successfully used as tools for rescuing banking systems, stimulating domestic output, or for raising prices. Rather they appear to have been maintained as a means for restricting trade and repayment of foreign debts.
Angus Deaton, Bettina Aten, 16 July 2014
When the international comparison project published its latest estimates of purchasing power parity exchange rates in April there was some consternation. Poor countries became richer overnight, world GDP increased, and global income inequality was revised downwards. Alas, no one stopped being poor. This column digs into the numbers to see if we’ve been consistently underestimating the relative size of poorer economies and overestimating global poverty and inequality.
Filippo di Mauro, Francesco Pappadà, 02 June 2014
Trade imbalances in the Eurozone require relative price adjustments. This column argues that the traditional ‘elasticity’ approach is lacking when thinking about the adjustment magnitude. Exports adjust when exporting firms sell more (intensive margin) and new firms start exporting (extensive margin). The extensive-margin reaction depends upon the fatness of firm-level productivity distributions. Surplus-country distributions have fatter tails than deficit countries, suggesting that the price adjustment magnitude may be larger than traditional calculations suggest.
Joshua Aizenman, Mahir Binici, Michael M Hutchison, 04 April 2014
In 2013, policymakers began discussing when and how to ‘taper’ the Federal Reserve’s quantitative easing policy. This column presents evidence on the effect of Fed officials’ public statements on emerging-market financial conditions. Statements by Chairman Bernanke had a large effect on asset prices, whereas the market largely ignored statements by Fed Presidents. Emerging markets with stronger fundamentals experienced larger stock-market declines, larger increases in credit default swap spreads, and larger currency depreciations than countries with weaker fundamentals.