for Global Liquidity and Robust Growth Remarks to The Bank of Korea - - PowerPoint PPT Presentation

Panel Discussion: Coordinated Policies for Global Liquidity and Robust Growth

Remarks to The Bank of Korea International Conference 2013 4 June 2013 Seoul, Korea

Timothy Lane Deputy Governor Bank of Canada

Basic questions

• Where is there a need for coordination? T
• what extent do

decentralized policies yield the “right” outcome?

• T
• the extent that coordination may be needed, are existing

means of coordination adequate?

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Central bank policies have helped counter private deleveraging

• The collapse of private liquidity through crisis and the

subsequent deleveraging process in post-crisis economies exerted powerful contractionary forces on the global economy.

• Central banks in major jurisdictions—including U.S., E.U.,

Japan, U.K.—cut policy rates to historic lows and have expanded their balance sheets.

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Policy interest rates were cut to historic lows

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1 2 3 4 5 6 7 % Canada United States Euro area Japan

Policy interest rates, daily data

Last observation: 29 May 2013 Note: On 5 October 2010, the Bank of Japan changed the target for its policy rate from 0.1 per cent to a range of 0.0 to 0.1 per cent. The U.S. Federal Reserve has been maintaining a target range for its policy rate of 0.0 to 0.25 per cent since 16 December 2008. Sources: Bank of Canada, U.S. Federal Reserve, European Central Bank and Bank of Japan

Major central banks have committed to providing substantial unconventional stimulus

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U.S. Federal Reserve European Central Bank Bank of England Bank of Japan 5 10 15 20 25 30 35 40 Percentage points Change in assets relative to GDP between 2007Q2 and 2013Q1 Expected change in assets relative to GDP between 2013Q2 and 2015Q4

Change in central bank assets relative to GDP since 2007Q2

Last observations: Euro area, 2012Q4; other countries, 2013Q1 Note: Expected increase in the assets of the U.S. Federal Reserve is based on an average of private sector forecasts. For the Bank of Japan, the expected change in assets is based on the most recent policy announcement. Data for the ECB represent the change between 2007Q2 and 2012Q4. Sources: U.S. Federal Reserve, U.S. Bureau of Economic Analysis; European Central Bank, Eurostat; Bank of England, U.K. Office for National Statistics; Bank of Japan, Cabinet Office of Japan; and Bank of Canada calculations

Effects on non-crisis countries

• Expansionary monetary policy to support domestic objectives

in post-crisis economies can put upward pressure on other countries’ currencies—resulting in appreciation where exchange rates are flexible.

• On balance, however, exceptional easing in post-crisis

economies is likely to be beneficial to other countries that were not at the centre of the crisis, since the favourable effects

• f stronger growth in the major post-crisis economies
• utweigh the adverse effects of currency appreciation.

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Currencies of non-crisis countries appreciated from their crisis lows

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Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 90 100 110 120 130 140 150 160 Index Canada Australia Brazil Korea Sweden Switzerland

Real broad effective exchange rate indexed to December 2008 = 100, monthly data

Last observation: April 2013 Sources: Bank for International Settlements and Bank of Canada calculations

Monetary easing in non-crisis countries results in domestic imbalances

• In some of the non-crisis countries, monetary easing has resulted in

a pattern of growth more heavily reliant on domestic demand than

• n exports.
• There are limits to this growth strategy, as imbalances have

appeared in housing markets and the financial system more broadly. – Household imbalances in Canada are an example. We are now seeing a constructive evolution of household debt as growth in total household credit has continued to moderate.

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Canada’s export recovery is the weakest in postwar period

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1 2 3 4 5 6 7 80 90 100 110 120 130 140 150 160 170 180 Index Current cycle Average of previous cycles (since 1951) Base-case scenario Range of previous cycles (since 1951)

Comparison of real exports across economic cycles; quarter before the downturn in real GDP = 100, quarterly data

Sources: Statistics Canada and Bank of Canada calculations and projections

Years before the downturn Years after the downturn Quarterly peak in real GDP before the downturn 9

Canada has relied on domestic demand

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 88 90 92 94 96 98 100 102 104 106 108 Index Canada United States United Kingdom Euro area Japan

Evolution of real private domestic demand since pre-recession peak

Index, peak of real GDP = 100, quarterly data

Last observation: 2012Q4 UK and EA; 2013Q1 all others Note: Private domestic demand includes consumer and business and residential investment, except for the Euro area, where it includes government investment. Sources: Statistics Canada, U.S. Bureau of Economic Analysis, Eurostat, Cabinet Office of Japan, U.K. Office for National Statistics, and Bank of Canada calculations

Canadians are now more indebted than the Americans or the British

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 70 80 90 100 110 120 130 140 150 160 170 % Canada United States United Kingdom

Ratio of household debt to disposable income

Last observation: 2012Q4 Sources: Statistics Canada (ratio of Canadian household credit market debt to disposable income, adjusted for U.S. concepts and definitions), U.K. Office for National Statistics and U.S. Federal Reserve

Imbalances in Canadian housing markets

12 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 20 40 60 80 100 120 140 160 180

Price-to-income ratio Historical average from 1981 to present Price-to-rent ratio House prices are still high relative to income and rents

Last observation: 2012Q4 Note: The historical average from 1981 to latest available is set equal to 100. Sources: Teranet-National Bank, Statistics Canada, Canadian Real Estate Association and Bank of Canada calculations.

House price-to-income and price-to-rent ratios 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 %

The share of residential investment in GDP is elevated

Ratio of nominal residential investment to nominal GDP

Last observation: 2012Q4 Note: The broken line indicates the historical average from 1975 to the present. Sources: Statistics Canada and Bank of Canada calculations

Countries with less-flexible exchange rates have responded differently

• For non-crisis countries with less-flexible exchange rates,

expansionary monetary policy in post-crisis economies has added to capital inflows.

• If these inflows were unsterilized, they would result in higher inflation

and thus real exchange rate appreciation.

• In practice, this has taken place only to a limited degree. T
• some

extent, inflows have been sterilized, accompanied by various restrictions on the financial system.

• From a global perspective, such sterilization partly offsets the effects
• f the monetary expansion in post-crisis countries

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This is part of the broader problem of external adjustment

• Starting from an unsustainable configuration of savings-

investment imbalances, deleveraging is needed in deficit countries, accompanied by a rotation of demand toward domestic demand in surplus countries and supported by real exchange rate adjustment—the “good solution.”

• In the wake of the crisis, market forces have driven deficit

countries toward deleveraging.

• But the surplus countries have felt less pressure to bring about

a rotation of demand.

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The “good” solution: adjustment in exchange rates

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Real effective exchange rates in China and the United States

Index: 2011Q3 = 1

2004 2006 2008 2010 2012 2014 2016 2018 2020 0.8 0.9 1.0 1.1 1.2 1.3

China: Good Solution US: Good Solution

Last observation: June 2011 Sources: GMUSE and BoC-GEM-Fin simulations

Data Projection Index

The “good” solution: global imbalances resolved

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Current account balances

% of GDP

• 9
• 6
• 3

3 6 9 12 2004 2006 2008 2010 2012 2014 2016 2018 2020

United States China Japan Euro area

Last observation: June 2011 Sources: GMUSE & BoC-GEM-Fin simulations

Data Projection

Delayed or asymmetric adjustment

• In the “bad” scenario, adjustment is delayed and real

exchange rates do not adjust. – Bank of Canada estimates that $6 trillion in global output would be lost.

• Asymmetric adjustment is the “ugly” scenario: deleveraging in

deficit countries, but no rotation of demand in surplus countries. – Output losses may be even larger.

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Doing half the job could be even worse...

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2010 2011 2012 2013 2014 2015 0.90 0.92 0.94 0.96 0.98 1.00 1.02 Bad solution Ugly solution Data Projection

Sources: GMUSE and BoC-GEM-Fin simulations Last observation: June 2011

The “bad” and the “ugly” scenarios – GDP relative to the good scenario

Index: 2011Q3 = 1 Index

Coordination in the G-20 Framework

• The G-20’s Framework for Strong, Sustainable and Balanced

Growth (T

• ronto 2010 Summit) is intended to provide a focal

point for appropriate policies.

• The G-20 have established a peer-review mechanism to track

progress.

• The IMF’s bilateral and multilateral surveillance both work

toward broadly similar objectives.

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