Capital Flows and the Crisis:
The ‘system’ isn’t working
Kevin P. Gallagher
Global Economic Governance Initiative, Boston University
www.bu.edu/gegi
Outline
This time was (somewhat) different: Many EMDs
regulated capital flows AND the West didn’t clamp down.
The ‘system” still isn’t working: Despite a more inclusive
G-20 arrangement and movement at the IMF, there is a
lack of coordination on macroeconomic policy and financial
reform that would reduce the risks associated with capital
flows.
Need stronger effort at ‘both ends’: EMDs need to craft
more permanent and stronger regulations and the West
needs to channel its monetary policy better and coordinate
on financial reform.
The Kindleberger 5
1.
2.
3.
4.
Maintaining open markets
Lender of Last Resort
Providing counter-cyclical lending
Policing a relatively stable exchange rate
system
5. Ensuring macroeconomic coordination
Charles Kindleberger (1986) The World in Depression: 1929–1939, University of California Press.
LOLR: Swap Lines from FED, ECB, PBOC
Country
US FED
ECB
PBOC
(USbillions)
Argentina
Australia
Brazil
Belarus
Canada
Denmark
ECB
Hong Kong
Hungary
Iceland
Indonesia
Japan
Korea
Mexico
Malaysia
Norway
New Zealand
Poland
Sweden
Singapore
Switzerland
UK
Sub-totals
70
30
30
20
30
15
240
15
200
5
1.5
100
120
30
30
180
80
15
15
10
30
30
60
80
755
31.5
650
EMD total
TOTAL
685
1,437
Aizenman, Joshua and Gurnain Pasricha “Selective Swap Arrangements and the Global Financial Crisis: Analysis & Interpretation”, International Review of Economics and Finance.
Little Counter-cyclical Lending in
US
Table 1 US commercial bank cash reserves relative to bank liabilities and G D P
during six economic recovery p e r i o d s
1973
following 11/70 recession t r o u g h
1977
following 3/75 recession t r o u g h
1985
following 11/82 recession t r o u g h
1993
following 3/91 recession t r o u g h
2004
following 11/01 recession t r o u g h
2011
following 6/09 recession t r o u g h
Commercial bank
reserves (billions $)
Reserves as pct of
bank liabilities
Reserves as
pct of GDP
27.1
3.6%
1 .9 %
26.9
2.9%
1 .3 %
28.6
1.4%
0 .7 %
35.0
1.2%
0 .5 %
24.0
0.4%
0 .2 %
1595.9
15.3%
1 0 .5 %
Note: Figures are for two years into economic recoveries.
Source: Flow of Funds Accounts of Federal Reserve System.
Counter-cyclical lending for
South?
Exchange Rate Stability?
Source: Institute for International Finance, Capital Markets Monitor, 2012 (million USD)
0
Source: MSCI Emerging Market Currency Index, Bloomberg
8/ 1/ 13
5/ 1/ 13
2/ 1/ 13
11/ 1/ 12
8/ 1/ 12
5/ 1/ 12
2/ 1/ 12
11/ 1/ 11
8/ 1/ 11
5/ 1/ 11
2/ 1/ 11
11/ 1/ 10
8/ 1/ 10
5/ 1/ 10
2/ 1/ 10
11/ 1/ 09
8/ 1/ 09
5/ 1/ 09
2/ 1/ 09
11/ 1/ 08
8/ 1/ 08
5/ 1/ 08
2/ 1/ 08
11/ 1/ 07
8/ 1/ 07
5/ 1/ 07
2/ 1/ 07
11/ 1/ 06
8/ 1/ 06
5/ 1/ 06
2/ 1/ 06
11/ 1/ 05
8/ 1/ 05
5/ 1/ 05
2/ 1/ 05
(Nominal)Exchange Rate
Stability?
Emerging Market Currencies
1600
1400
1200
1000
800
600
400
200
Macro-coord: G-20, they are
talking
G-7/G-8, 2013
•
“We, the G7 Ministers and
Governors, reaffirm our
longstanding commitment to
market determined exchange
rates and to consult closely in
regard to actions in foreign
exchange markets. We
reaffirm that our fiscal and
monetary policies have been
and will remain oriented
towards meeting our
respective domestic objectives
using domestic instruments,
and that we will not target
exchange rates.”
G-20, 2013
•
“We commit to monitor and
minimize the negative
spillovers on other countries
of policies implemented for
domestic purposes."
0
Source: Federal Reserve Bank of New York
9/ 1/ 13
6/ 1/ 13
3/ 1/ 13
1
12/ 1/ 12
9/ 1/ 12
6/ 1/ 12
3/ 1/ 12
12/ 1/ 11
9/ 1/ 11
6/ 1/ 11
3/ 1/ 11
12/ 1/ 10
9/ 1/ 10
6/ 1/ 10
3/ 1/ 10
12/ 1/ 09
9/ 1/ 09
6/ 1/ 09
3/ 1/ 09
12/ 1/ 08
9/ 1/ 08
6/ 1/ 08
3/ 1/ 08
12/ 1/ 07
9/ 1/ 07
6/ 1/ 07
3/ 1/ 07
12/ 1/ 06
9/ 1/ 06
US FFR
But not walking the talk…
USFederal Funds Rate, 2006-2013
6
5.25
5
4
3
2
.08
But not walking the talk..
Source: Helene Rey (2013) “Dilemma not Trilemma” Jackson Hole Symposium
Source:Thompson Data Stream
Macro-Coord:
G-20 ‘Coherent Conclusions’
“Capital flow management measures may
constitute part of a broader approach to
protect economies from shocks. In
circumstances of high and volatile capital
flows, capital flow management measures
can complement and be employed
alongside, rather than substitute for,
appropriate monetary, exchange rate,
foreign reserve management and prudential
policies.”
Weak Coordination on Financial
Reform
• G-20:
–margin
requirements
–leverage
limits
–position limits
• Dodd-Frank
– Exempts FX
derivatives
– No cross-border
application
– Volcker rule under
fire
• TPP
– No exceptions for
inflows regs or
14
BOP crises
Toward a More Coordinated
Approach
• EMDs: stronger and institutionalized capital flow management
strategies
– Cloak in ‘macro-prudential framework’
– Make them ‘automatic’ to certain debt thresholds?
– Focus on FX derivatives: Leverage ratios, margin, and position limits
• Industrialized nations: internalize negative spillovers abroad
– Channel monetary policy toward domestic (productive) investment Signal
clearly and coordinate beforehand
– Vocal support for EMD efforts
• International Institutions: coordinate on equal ground
–
–
–
–
–
Substantial IMF quota reform and alternative institutions
Assist in enforcement and coordination of CARs
IMF surveillance on industrialized spillovers
IMF/FSB/US vocal support for EMD measures
IMF/FSB/US support for enforcement and capabilities enhancement
MA R C h 2 0 1 3
P a r d e e C e n t e r T A S K F O R C E REpORT
www.bu.edu/gegi
Capital Account R e g u l a t i o n s
and the Trading S y s t e m :
A Compatibility Review