Trade Blocs and Monetary Unions
Mauro F. Guillén
Multilateralism: The GATT Rounds
(General Agreement on Tariffs and Trade)
Name
Start
Duration Countries Subjects covered
Geneva
Apr-47
7 mos.
23
Tariffs
Signing of GATT, 45,000 tariff concessions affecting $10 billion
of trade
Annecy
Apr-49
5
13
Tariffs
Countries exchanged some 5,000 tariff concessions
Torquay
Sep-50
8
38
Tariffs
Countries exchanged some 8,700 tariff concessions, cutting the
1948 tariff levels by 25%
Geneva II
Jan-56
5
26
Tariffs, admission of Japan
$2.5 billion in tariff reductions
Dillon
Sep-60
11
26
Tariffs
Tariff concessions worth $4.9 billion of world trade
Kennedy
May-64
37
62
Tariffs, Anti-dumping
Tariff concessions worth $40 billion of world trade
Tokyo
Sep-73
74
102
Tariffs, non-tariff measures,
"framework" agreements
Tariff reductions worth more than $300 billion dollars achieved
Uruguay*
Sep-86
87
123
Doha**
Nov-01
?
141
Achievements
The round led to the creation of WTO, and extended the range of
Tariffs, non-tariff measures, rules,
trade negotiations, leading to major reductions in tariffs (about
services, intellectual property,
40%) and agricultural subsidies, an agreement to allow full access
dispute settlement, textiles,
for textiles and clothing from developing countries, and an
agriculture, creation of WTO, etc
extension of intellectual property rights.
Tariffs, non-tariff measures,
agriculture, labor standards,
environment, competition,
The round is not yet concluded.
investment, transparency, patents
etc
* Ended with the creation of the WTO. ** Started by the WTO.
The WTO
Dark green: founding members in 1995. (Today there are 153.)
Types of Blocs
A. A group of countries that agrees to one or more of the
following:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Reduce tariffs for certain goods [preferential trade area].
Remove internal trade barriers [free trade area].
Coordinate external trade barriers [customs union].
Allow for the free movement of capital
[common market].
Allow for the free movement of labor
[single market].
Coordinate indirect tax policy
Coordinate regulatory & competition policies
Coordinate macroeconomic policies [economic union].
Introduce a common currency [monetary union].
Merge treasuries and fiscal policies [fiscal union].
Coordinate foreign & defense policies [political union].
B. The European Union meets criteria 2-7 & 9 (8?).
C. The NAFTA meets criteria 2 and 4.
D. The Mercosur/Mercosul meets criteria 1-4.
Trade Blocs Tend to Include Countries:
•
•
•
•
At similar levels of development.
Geographically close or adjacent.
With similar trade regimes.
Sharing a desire to organize regionally.
How Common are They?
• 1834: Zollverein, first modern trade bloc.
• There are 219 trade blocs presently in force,
and registered with the WTO
http://rtais.wto.org/UI/PublicAllRTAList.aspx
• 1990s: Trend towards continental-size blocs.
Main Trade Blocs
What are Trade Blocs, Really?
• People are very excited about trade blocs.
• Officially, an attempt to enhance trade.
• In reality, trade blocs destroy, divert, and
create trade in complex ways.
• They can be an attempt to privilege insiders
relative to outsiders.
NAFTA
• Only large trade bloc that includes both rich &
developing countries:
– Mexico is “so far away from God, and… …”
– Very controversial (“social dumping”).
• It’s a “free trade area” + free capital flows:
– Origin & content rules are necessary.
– Various unintended consequences/effects.
• External trade policies are not coordinated.
• Some product & environmental regulations.
• Trucking issue: first Mexican truck crossed the
border in October 2011.
Automobile Assembly in Mexico
(thousand units)
Timeline
NAFTA
Peak
Nadir
Most Recent
1994
2000
2004
2010
Chrysler
239
408
156
257
Ford
226
265
71
393
GM
161
436
141
559
Honda
0
19
21
5
Nissan
194
313
277
506
Renault
0
0
11
0
256
426
225
434
0
0
0
54
1077
1868
903
2260
64%
82%
VW
Toyota
Total
% exported
Sources: Automotive News; Asociación Mexicana de la Industria Automotriz.
A maquila worker inserts
electronic components at an
assembly line for video turners,
Tuesday, Nov. 18, 1998 at the
Samsung Electromechanics plant
in Tijuana, Mexico. Sprawled
across a hillside on Tijuana's
outskirts, Samsung's state-of-theart manufacturing complex is a
hive of activity, except for the
cavernous blue-and-beige
building on the campus' eastern
edge. Built as part of a planned
$400 million expansion, the
empty building now serves only
as a reminder of the long reach of
the Asian financial crisis.(AP
Photo/Damian Dovarganes)
FTAs: Origin and Content Rules
• For a good to be sold duty-free anywhere
within the FTA, it must exceed a minimum
level of “local content.”
• For instance, in the NAFTA, an automobile
is deemed to be “North American” if the
percentage of local (i.e. within bloc) value
attributable to 69 key components (e.g.,
engines, transmissions, bumpers) exceeds
62.5% .
A Sudden Devaluation
• In late 1995 and early 1996, over a period
of 5 weeks, the Mexican peso lost 45% of
its value relative to the dollar.
• What was the consequence of this change
for companies wishing to comply with the
62.5% local content rule?
• How could they adapt to the new situation?
Economic Controversies
• Competitive implications:
– Economies of scale.
– Improved terms of trade (through either
bargaining power or specialization):
p is price, q is quantity.
X is exports, M is imports.
c is the current period.
0 is the base period.
i is the product.
• Welfare implications: trade creation,
diversion, and destruction, depending on the
characteristics of the bloc (FTA vs. CU,
level of external tariff(s), etc.).
Source: Edward D. Mansfield and Helen V. Milner, “The New Wave of Regionalism.” International Organization 53(3) (Summer 1999):589-627.
Political Controversies
• Domestic:
– Who is in favor, and who is against? Exporters
(L vs. K-intensive), import-competitors,
consumers, investors, etc.
– Justification for unpopular adjustment policies.
• International:
– Pressures towards democratization (e.g. Spain,
Portugal, Paraguay, etc.).
– Enhanced power in multilateral trade
negotiations.
– Improved global governance.
– Extension of influence over weaker states.
Sources: Edward D. Mansfield and Helen V. Milner, “The New Wave of Regionalism.” International Organization 53(3) (Summer 1999):589-627; Andrew G.
Brown, and Robert M. Stern, “Free Trade Agreements and the Governance of the Global Trading System.” The World Economy (2011):331-354.
Local Content Formula
Problem Set #2
• Please work individually.
• Due in one week from today.
The Euro Cliffhanger:
An Avalanche of Thrills
National
Currencies: The
Post Bretton
Woods World
Source: Reuven Glick and Andrew K. Rose,
“Contagion and Trade. Why are Currency Crises
Regional?”Journal of International Money and Finance 18
(1999):603-617.
Monetary Unions
Monetary Unions
Economic and Monetary Union (Eurozone)
# Members
GDP
2007
$bn
17
12,225
Economic and Monetary Community of Central Africa
6
59
West African Economic and Monetary Union
8
58
Overseas Issuing Institute (French Polynesia, New Caledonia,
Wallis and Fotuna)
3
14
Organisation of Eastern Caribbean States
6
4
The Governing
Council makes
decisions by
majority vote.
Source: Roel Beetsma and Massimo Giuliodori, “The Macroeconomic Costs and Benefits of EMU and Other Monetary Unions.” Journal
of Economic Literature 48 (September 2010):603-641.
Consequences of Monetary Unions
• Member countries cannot print money to
inflate their debt away.
• They cannot devalue the currency to regain
competitiveness.
• In order for a monetary union to work:
– Labor needs to be able & willing to move
around in search of opportunities.
– Fiscal union is advisable. Because members
usually retain sovereignty, they usually do not
get transfers to make up for revenue shortfalls
or increased social spending during a crisis.
Nota bene: Robert Mundell won the Nobel Prize for his work on optimal currency areas.
The Way it Was Supposed to Be
• The architects of the euro believed that a Greece-like
problem would not occur because financial markets
would have punished countries with excessive debt by
raising the cost of borrowing. They didn’t until the
global financial crisis started.
• The European Central Bank (ECB):
– Prohibits loaning money to service national debts.
– Its no-bail-out clause discourages overspending. It did
not.
• The Stability and Growth Pact should have prevented
the situation from worsening:
– Deficit/GDP ≤ 3% and Gross debt/GDP ≤ 60%.
– It was not enforced, and in 2005 the rules were relaxed at
the request of France and Germany.
Source: Lorenzo Bini Smaghi, “The Future of the Euro.” Foreign Affairs (2010).
Country
GDP Consumer
Growth
Prices
(%)
(%)
Budget
balance
(% GDP)
Debt
stock
(% GDP)
Current account
balance
(% GDP)
Unemployment
(%)
USA
+1.6
+3.9
-9.1
62.3
-3.3
9.1
China
+9.1
+6.1
-1.8
18.9
+4.0
6.1
Japan
-1.1
+0.2
-8.3
197.5
+2.4
4.3
UK
+0.6
+5.2
-8.8
76.1
-2.0
8.1
Eurozone
+1.6
+3.0
-4.2
…
-0.5
10.0
Austria
+3.5
+3.8
-3.6
71.0
+2.9
3.7
Belgium
+2.3
+3.6
-3.8
100.9
+1.1
6.8
France
+1.7
+2.2
-5.8
82.4
-2.5
9.9
Germany
+2.8
+2.6
-1.7
83.2
+5.1
6.9
Greece
-7.3
+3.1
-9.1
142.8
-9.6
16.5
Ireland
+2.3
+2.6
-10.1
96.7
+0.6
14.3
Italy
+0.8
+3.1
-3.7
119.1
-3.7
7.9
Holland
+1.6
+2.7
-3.8
62.6
+7.4
5.6
Portugal
-0.9
+3.6
-6.7
93.0
-8.4
12.1
Spain
+0.7
+3.1
-6.5
60.1
-4.4
21.2
Labor Protections in the OECD
Eurozone:
Austria
Belgium
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Portugal
Slovakia
Spain
Other
countries:
Brazil
Chile
China
India
1990
2.21
3.15
2.33
2.98
3.17
3.50
0.93
3.57
2.73
4.10
…
3.82
..
..
..
..
2000
2.21
2.18
2.09
2.98
2.34
3.50
1.11
2.51
2.12
3.67
1.80
2.93
..
..
..
..
2008
1.93
2.18
1.96
3.05
2.12
2.73
1.11
1.89
1.95
3.15
1.44
2.98
2.75
2.65
2.65
2.77
Other OECD:
Australia
Canada
Hungary
Japan
South Korea
Mexico
Poland
Sweden
Switzerland
Turkey
UK
USA
OECD average
Indonesia
Israel
Russia
South Africa
1990
0.94
0.75
1.27
1.84
2.74
3.13
1.40
3.49
1.14
3.76
0.60
0.21
2000
1.19
0.75
1.27
1.43
2.03
3.13
1.40
2.24
1.14
3.72
0.68
0.21
2008
1.15
0.75
1.65
1.43
1.90
3.13
1.90
1.87
1.14
3.72
0.75
0.21
..
2.00
1.94
..
..
..
..
..
..
..
..
3.68
1.37
1.92
1.25
Note: The index is based on protections against dismissal for permanent employees, regulation of temporary employment, and requirements
for collective dismissal. Source: OECD Employment Protection Legislation database.
EU Banks’ Exposure to Sovereign Debt
Source: Adrian Blundell-Wignall and Patrick Slovik, “The EU Stress Test and Sovereign Debt Exposures.” (OECD, August 2010).
Counterparty Risk
• Nobody really knows how much because
most instruments are traded over the
counter. Estimates range between €4 and
€100 or more billion of exposure to a Greek
“credit event.”
• Hedging.
• CDSs.
• Naked CDSs.
Public Debt as % of GDP
Note: Data after 2009 are projections. Source: IMF.
Net government lending (+) or net borrowing (-), % of GDP (Source: OECD)
France
Germany
Greece
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Central
-5.28
-4.09
-3.54
-2.91
-2.09
-1.67
-1.69
-3.29
-4.15
-3.48
-2.77
-2.15
-2.33
-2.89
-7.28
Local
-0.18
0.06
0.23
0.30
0.32
0.19
0.13
0.13
0.03
-0.14
-0.19
-0.17
-0.40
-0.45
-0.29
Central
-8.31
-2.19
-1.51
-1.67
-1.26
1.39
-1.48
-2.00
-2.19
-2.41
-2.30
-1.27
-0.31
-0.27
-2.19
Länder
-1.15
-1.10
-1.13
-0.72
-0.47
-0.34
-1.29
-1.43
-1.51
-1.26
-1.00
-0.45
0.17
0.07
-0.68
Local
-0.21
-0.03
0.01
0.22
0.27
0.26
-0.05
-0.23
-0.33
-0.11
-0.01
0.12
0.40
0.31
-0.17
Central
-9.14
-6.70
-5.95
-3.88
-3.19
-3.73
-4.58
-4.83
-5.75
-7.28
-5.30
-5.94
-6.66
-9.57
-15.46
Local
Hungary
Central
Local
Ireland
Central
Local
Italy
Mexico
Poland
Portugal
Sweden
Turkey
0.06
0.05
0.09
0.00
0.14
0.00
0.04
-0.14
-0.05
-0.11
-0.05
-0.03
-0.03
-5.52
-7.15
-5.14
-2.75
-4.19
-8.07
-7.06
-6.12
-7.40
-8.57
-4.90
-3.77
-3.99
0.14
0.38
-0.02
-0.30
0.00
-0.27
0.11
-0.87
-0.16
-0.28
-0.55
-0.81
-0.11
0.07
-0.37
-2.24
-0.29
1.26
2.21
2.45
4.91
1.43
0.04
0.11
1.29
1.41
2.72
0.24
-7.03
-14.23
0.19
0.18
0.18
0.06
0.16
-0.13
-0.48
-0.34
0.30
0.11
0.24
0.23
-0.22
-0.27
-0.15
-6.56
-2.49
-2.83
-1.19
-0.72
-2.82
-2.20
-3.09
-2.57
-3.52
-2.34
-1.33
-2.35
-4.88
0.06
-0.40
-0.19
-0.24
-0.59
-0.14
-0.28
-0.81
-0.45
-0.99
-0.85
-1.00
-0.15
-0.33
-0.37
Central
-2.11
-2.36
-1.73
-9.39
-6.29
-5.96
-5.83
-7.01
-6.42
-4.76
-5.88
-1.02
-2.84
-3.03
Local
-2.86
-2.51
-2.24
-2.43
-1.60
-0.89
-0.90
-1.31
-1.28
-0.72
-0.27
0.01
-0.10
-0.01
Central
0.03
0.36
0.42
0.11
0.06
-2.41
-0.90
State
-0.07
0.25
-0.05
0.11
-0.51
-0.19
-0.28
Local
0.11
-0.09
0.00
0.01
-0.03
0.07
-0.14
-5.48
-3.94
-3.38
-1.93
-3.50
-6.20
Central
-3.40
-3.75
-3.57
-3.29
-1.43
-2.62
-4.81
-4.58
-5.81
Local
-1.02
-1.12
-1.07
-0.98
-0.88
-0.41
-0.46
-0.40
-0.38
0.09
-0.14
-0.25
0.04
-0.18
-1.04
Central
-5.11
-4.26
-2.98
-3.86
-2.96
-2.56
-3.93
-2.50
-2.67
-3.31
-5.54
-3.95
-2.58
-2.63
-8.70
0.08
-0.28
-0.41
0.38
0.24
-0.37
-0.39
-0.44
-0.42
-0.10
-0.34
-0.13
-0.26
-0.37
-0.66
Central
-5.82
-4.22
-3.09
-2.86
-1.25
-0.58
0.02
0.13
0.50
-0.29
1.31
1.98
2.43
-2.04
-8.56
CC.AA.
-0.64
-0.65
-0.32
-0.39
-0.18
-0.51
-0.64
-0.49
-0.49
-0.07
-0.29
-0.04
-0.22
-1.62
-1.98
Local
-0.03
0.01
0.02
0.03
-0.01
0.09
-0.04
-0.12
-0.24
0.01
-0.06
0.08
-0.31
-0.49
-0.58
Central
-6.97
-2.97
-1.16
1.06
1.12
3.53
1.83
-0.89
-0.91
0.38
1.52
2.09
3.42
2.33
-0.69
Local
-0.35
-0.35
-0.48
-0.18
-0.33
0.06
-0.25
-0.59
-0.35
0.03
0.43
0.13
0.11
-0.11
-0.28
Local
Spain
0.05
-4.75
-7.48
Central
Local
Japan
0.07
-8.87
Central
Local
UK
USA
1.01
-0.76
-1.10
-5.94
-0.17
-0.41
-1.12
-0.76
Central
-5.54
-4.13
-2.04
0.17
1.12
1.65
0.85
-1.87
-3.41
-3.10
-2.98
-2.67
-2.62
-4.63
-10.89
Local
-0.38
-0.13
-0.14
-0.27
-0.20
-0.30
-0.27
-0.11
0.10
-0.27
-0.36
0.02
-0.06
-0.26
-0.40
Central
-2.76
-1.90
-0.57
0.54
1.08
1.91
0.39
-2.60
-3.83
-3.61
-2.76
-1.82
-2.23
-5.25
-10.50
State
-0.46
-0.31
-0.23
-0.16
-0.31
-0.36
-0.93
-1.30
-1.08
-0.79
-0.44
-0.22
-0.52
-0.96
-0.69
The “PIIGS”
Source: IMF, World Economic Outlook (September 2011).
Source: IMF, Global Financial Stability Report (September 2011).
What Are Policymakers Doing?
They are meeting…
… and making some decisions…
Only €440 in the fund.
€100 IT+ES; €70 PIG.
The Euro Deal 27 October 2011
• Greek debt: haircut of 50%.
• Bank recapitalization for €106 bn ($146
bn). Must reach 9% of tier 1 capital within 9
months. (But the calculations based on just
70 banks out of the 5,000 in the Euro Zone.
• Firewall: €1 trillion European Financial
Stability Facility, but with just 20% equity.
The rest to be raised through Special
Purpose Vehicles issuing collateralized debt
obligations (up to a ×5 leverage).
Europe’s Biggest Problem:
Lack of Leadership
From The Economist, April 2-8, 2011.
Claudio Barbaro (L), a member of the opposition FLI party, fought with Fabio Ranieri (R) from the Northern League in Italy's Parliament on
26 October 2011. Photo Reuters.
Is the Euro Good for Germany?
• Eurozone: 2/5 of German exports.
• The crisis in the periphery of the Eurozone
has depressed the value of the euro. The
DM would be overvalued nowadays.
• German firms benefited from the
investment boom in the periphery.
• Large German firms in favor of bailouts;
Mittelstand firms skeptical.
• The rate of inflation in Germany has been
lower than with the DM.
• Reserves in € > [DM + FFr + Guilders].
Is the Euro Good for Greece?
Source: http://macrotragedy.blogspot.com/2011/10/greek-tradable-sector-odyssey.html
Greece’s Exports
•
•
•
•
•
•
•
Shipping services.
Tourism.
Apparel.
Vegetables & fruit.
Non-ferrous metals.
Pharmaceuticals.
Electrical equipment.
A White Knight?
Balance of Payments in 2010 (US$bn)
Concept
Formula / Notation
U.S.
China
India
Brazil
Gross Domestic Product
GDP
14582
5879
1729
2088
Trade balance in goods
(Xg-Mg)
-645.9
+254.2
-132.1
+20.2
Trade balance in services
(Xs-Ms)
+145.8
-22.1
+41.2
-30.8
Trade balance goods & services
(X-M)
-500.0
+232.1
-90.9
-10.6
Net income from abroad
(INF-IFF)
+165.2
+30.4
-13.1
-39.6
Net transfers from abroad
Z
-136.1
+42.9
+52.2
+2.8
Current account
(X-M) + (INF-IFF) + Z
-470.9
+305.4
-51.9
-47.4
Net capital transfers to/from abroad
F
-93.8
+226.0
+67.6
+99.7
Net foreign loan (reserve change)
SF
-347.9 +471.7
+13.2
+49.1
Capital account
F – SF
+254.1
-245.7
+54.5
+50.6
Statistical discrepancy
As reported by each government
+216.8
-59.7
-2.6
-3.2
Balance of payments
(X-M) + (INF-IFF) + Z + F – SF = 0
0.0
0.0
0.0
0.0
Source: Re-calculated by M. Guillen with data reported by BEA, State Administration of Foreign Exchange, Central Bank of India, and Banco Central do Brasil.
Additional Slides
on the Euro Cliffhanger
Frequency
of Financial
Crises
Twin crisis =
banking + currency.
Triplet crisis =
banking + currency +
sovereign debt.
Source: Luc Laeven and Fabian
Valencia, “Systemic Banking Crises:
A New Database.” IMF WP 08/224.
Source: Carmen M. Reinhardt and Kenneth S. Rogoff, “This Times is Different.” NBER WP 13882 (2008).
G7 Sovereign Debt (% of GDP)
Source: IMF, “Long-Tern Trends in Public Finances in the G-7 Economies” (2010).
G7 Sovereign Debt (continued)
Source: IMF, “Long-Tern Trends in Public Finances in the G-7 Economies” (2010).
Bank Holdings of Sovereign Debt
(Dec 2010)
Banks’ Capital Needs
(adjusted for the impact of sovereign debt holdings, 2011)
Trust in the Banks
We’re All Different…
•
“Italy is absolutely not in the same situation as Greece.”
Jean-Claude Trichet, head of the European Central Bank, April 9
•
“What the Portuguese government wants the world to know is simpler: Portugal is not Greece.”
The Economist magazine, April 22
•
“Portugal, Spain, Ireland or Italy are not in the same situation as Greece. And Belgium less yet.”
Guy Quaden, governor of the National Bank of Belgium, May 7
•
“ ‘ Ireland is no Greece’ confirms latest economic forecast.”
Ernst and Young, in its Economic Eye Summer Forecast, June 2010
•
"Greece is not Ireland; it doesn’t have banking stability problems.”
George Papaconstantinou, finance minister of Greece, Nov. 8
•
“Our economy is very different from that of Greece or Ireland because our financial sector has
benefited by the supervision and regulation of the Bank of Spain, which was missing in Ireland.”
Elena Salgado, the Spanish finance minister in an interview in the British newspaper The
Independent, Nov. 25
•
Bank failures in Ireland had “nothing to do with Portugal.”
Ángel Gurría, secretary general of the OECD, in Bloomberg News, Nov. 22
•
“Portugal does not need any help, it is in a very different situation to Ireland.”
Herman Van Rompuy, the president of the European Council, Nov. 23
•
“Zapatero ‘gets it’ and Spain is taking its medicine pre-emptively. Certainly, Spain faces serious
economic growth and labor market challenges as it works its way through a devastating real estate
collapse in the coming quarters. But it has neither the debt stock of Greece, the bust banks of Ireland
or the complacent government of Portugal.”
Jacob Funk Kirkegaard, research fellow at the Peterson Institute of International Economics
in a CNBC guest blog post, Nov. 24.
Source: Landon Thomas, Jr. , “They are not like Ireland. Really.” The New York Times (Nov. 27, 2010).
… but Some Animals are More
Different Than Others.
The “Exorbitant Privilege”
of the Reserve Currency*
* Term used by French Finance Minister Valéry Giscard d’Estaing in the 1960s. Often misattributed to De Gaulle.
Balance of Payments in 2010 (US$bn)
Concept
Formula / Notation
U.S.
China
India
Brazil
Gross Domestic Product
GDP
14582
5879
1729
2088
Trade balance in goods
(Xg-Mg)
-645.9
+254.2
-132.1
+20.2
Trade balance in services
(Xs-Ms)
+145.8
-22.1
+41.2
-30.8
Trade balance goods & services
(X-M)
-500.0
+232.1
-90.9
-10.6
Net income from abroad
(INF-IFF)
+165.2
+30.4
-13.1
-39.6
Net transfers from abroad
Z
-136.1
+42.9
+52.2
+2.8
Current account
(X-M) + (INF-IFF) + Z
-470.9
+305.4
-51.9
-47.4
Net capital transfers to/from abroad
F
-93.8
+226.0
+67.6
+99.7
Net foreign loan (reserve change)
SF
-347.9 +471.7
+13.2
+49.1
Capital account
F – SF
+254.1
-245.7
+54.5
+50.6
Statistical discrepancy
As reported by each government
+216.8
-59.7
-2.6
-3.2
Balance of payments
(X-M) + (INF-IFF) + Z + F – SF = 0
0.0
0.0
0.0
0.0
Source: Re-calculated by M. Guillen with data reported by BEA, State Administration of Foreign Exchange, Central Bank of India, and Banco Central do Brasil.
Currency
Allocation
of
Reserves
Upper: total
Lower:
emerging &
developing
countries
Source: IMF.
Currency Allocation of Reserves
(% of total)
World
Developed
Emerging &
Developing
1995
2011 Q2
1995
2011 Q2
1995
2011 Q2
USD
59.0
60.2
54.2
63.6
71.9
56.5
Euro
-
26.7
-
24.9
-
28.7
Sterling
2.1
4.2
2.1
2.6
2.1
5.9
DM
15.8
-
16.1
-
14.8
-
FFr
2.4
-
2.3
-
2.5
-
Guilders
0.3
-
0.3
-
0.3
-
SFr
0.3
0.1
0.2
0.2
0.7
0.1
Yen
6.8
3.9
7.2
4.5
5.7
3.2
ECUs
8.5
-
11.7
-
0.1
-
Source: IMF.
Official Gold Holdings (10/2011)
One ton of gold is
worth about
US$61 million.
Gold Reserves Per Capita (2010):
Source: World Gold Council.
Foreign Currency Reserves + Gold
minus External Debt in 2010
Source: CIA Factbook (map from Wikipedia).
Exchange Rates
• The nominal exchange rate.
• The real exchange rate
= [€/$] × [US inflation/EZ inflation].
• The effective or trade-weighted exchange
rate = weighted average of exchange rates
of home and foreign currencies, with the
weight for each foreign country equal to its
share in bilateral trade.
Index 2000=100, three-month moving average
Source: IMF, World Economic Outlook (September 2011).
Source: http://macrotragedy.blogspot.com/2011/10/greek-tradable-sector-odyssey.html
Source: Multipolarity: The New Global Economy (The World Bank, 2011).
Reserve Currency
• Store of value.
• Medium of exchange.
• Unit of account.
• Determinants: GDP, trade, price stability,
and financial strength, both internal and
external.
Benefits to the Issuing Country
• Convenience to its resident firms and
individuals.
• Seigniorage (the “exorbitant privilege”): it
allows running a large current account
deficit and to accumulate debt at low
interest rates. This is true during both boom
and bust times.
• Geopolitical power, status, and prestige.
Costs to the Issuing Country
• The seigniorage effect makes the currency
appreciate, which hurts exports.
• Vulnerability to the actions of foreign
holders of assets denominated in the reserve
currency.
• Burden of responsibility and leadership.
• Requires openness to capital flows.
Source: Multipolarity: The New Global Economy (The World Bank, 2011).
Artist: Laura Gilbert. http://www.securitiesdocket.com/2008/10/04/the-zero-dollar-bill/
Source: Multipolarity: The New Global Economy (The World Bank, 2011).
A Renminbi Currency Area?
Source: Multipolarity: The New Global Economy (The World Bank, 2011).
Source: Multipolarity: The New Global Economy (The World Bank, 2011).
Special Drawing Rights (SDRs)
• Supplementary foreign exchange reserve assets
defined and maintained by the IMF.
• They represent a claim to currency held by IMF
member countries.
• They are allocated to countries by the IMF.
• Created in 1969, initially at 1 SDR = $1. This
week, 1 SDR = US$1.54.
• They are essentially a basket of currencies.
• There are 238.3 billion SDRs in existence, allotted
to countries depending on their IMF quota.
More on SDRs
• They carry a weekly interest rate (a weighted
average of short-term debt in the countries
represented in the basket), but it is only paid to
(from) a country if it holds more (less) than its
allotted quota of SDRs.
• They are a unit of account used by many
international agencies, including the IMF.
• Some countries peg their currencies to SDRs
(nowadays only the Czech Rep. and Jordan).
• They can also be issued by private parties.
• China is interested in SDRs playing a more
important role.
Value of 1 SDR
Note: The basket of currencies that values the SDR could be re-evaluated sooner than 2015 if the IMF decides that the
current basket no longer reflects "the relative importance of currencies in the world’s trading and financial systems.”
Source: Multipolarity: The New Global Economy (The World Bank, 2011).