Those were some of the topics of a recent Asia-Europe Economic Forum conference that took place at the French Ministry of Economy, Finance and Industry, entitled “G20: Completing the Agenda”, organised by Agnès Bénassy-Quéré and co-sponsored by CEPII, DG-ECFIN, and the Ministry of Economy, Finance and Industry.
The sessions were: What has the G20 Delivered so Far?, Global Rebalancing: are we on the Right Track?, The International Monetary System: Towards a New Era?, Public roundtable: G20 shortcomings and the way forward, Capital Flows: Towards a New Consensus?, and Fighting Volatility in Commodities Markets. The entire agenda, plus the available papers or presentations, is here.
There was way too much interesting material and dialog (the latter of which is not online) to summarize, so I’ll just highlight a few points I thought of interest.
Professor HE Fan, of the Chinese Academy of Social Sciences (CASS) made an interesting presentation reflecting (what I think) is a mainstream Chinese view regarding how best to deal with global imbalances: policy induced structural change, along with demographic and other factors, will mean a much altered Chinese economy in a decade — one that will presumably not run such large current account surpluses. (It occurred to me that it was not substantively different than that view forwarded by PBoC Deputy Governor YI Gang back in October). I commented that in order to get to the long run, one needs to survive in the short run — and time might not be on the side of the rational policymakers, given high unemployment and the likely rise of protectionist pressures in the advanced economies. Hence, policies with short term impacts might be advisable (e.g., accelerated RMB revaluation).
Masahiro Kawai and Shinji Takagi provided a useful (and refreshingly non-hyperbolic) assessment of the likely prospects for the RMB as international and regional currency. One observation of great importance — economic size and capital account liberalization is not sufficient conditions for a currency to become an international medium of exchange/store of value. The development of a financial sector (with all the attendant preconditions) is also necessary. (See Chinn and Frankel (2008) on this count).
Professor Jeffrey Frankel presented a paper wherein he argued that “product price target generally does a better job of stabilizing the real domestic prices of tradable goods than does a CPI target” for commodity exporters. This approach certainly outperforms the dollar peg.
My view is that if commodity exporting countries can be persuaded of the superiority of ths type of monetary policy, it might serve to delink a large number of economies from US monetary policy.
The presentation that elicited the most vigorous debate was Jonathan Ostry‘s discussion of the role of capital controls in managing inflows. His presentation is not online, but some feeling for the main ideas can be gleaned from this IMF Staff Position Note, published earlier this year. In any case, I think it the case that many policymakers allow that capital controls might be of use in limited instances. The question surrounds the issue of efficacy (and over what time horizon), and whether the resort to capital controls might make policymakers feel like they can avoid the tough choices, like fiscal restraint.
Finally, Professor David Vines provided a very interesting discussion (of my paper, as well as the other presentations in the session by Krzysztof Rybinski and Jonathan Ostry). In his presentation, he noted that the current world system is current playing a game with the following features:
We now have three targets: i.e. a satisfactory output levels/growth in three regions: the US, East Asia and Europe, but:
- We have only one-and-a-half instruments left —
- the dollar-renminbi real exchange rate, still set in East Asia to give exportled growth
- But we have reached the zero bound — so the real interest-rate-instrument has gone — although QE is half an instrument …
He concludes “This is an unhappy game”, with China as the Stackelberg leader, adjusting slowly, and the US and Europe as Stackelberg followers, trying to depreciate their currencies in any way they can. The end result is that real interest rates are too low for China, the emerging market economies, and the commodity exporters.