Rebalancing the International Economic Order Presentation to a - - PowerPoint PPT Presentation

Rebalancing the International Economic Order

Presentation to a conference hosted by the Peterson Institute for International Economics “Currency Wars: Economic Realities, Institutional Responses, and the G-20 Agenda” Washington, D.C. 2 April 2013

John Murray Deputy Governor Bank of Canada

Escaping the “prisoner’s dilemma”

• Urgent need to rotate global demand
• Deleveraging required in advanced economies and greater

reliance on external demand

• Less reliance on export-led growth required in emerging

market economies and increased reliance on domestic demand

• Fundamental asymmetries in the existing system and the

need for co-operative strategies (the G-20 Framework)

2

Estimating the benefits of co-operation and the costs of failure

Three illustrative scenarios drawn from model-based simulations:

• 1. The good solution
• 2. The bad solution
• 3. The ugly solution

3

Key elements of the good solution

The good solution involves four key elements:

• 1. Fiscal consolidation in most AEs
• 2. Household and bank deleveraging in many AEs
• 3. Structural reforms to promote growth in some AEs
• 4. Structural reforms and exchange rate adjustment in

many EMEs (Charts 1, 2)

4

Heavy costs of delaying needed adjustment

The bad solution occurs when essential policies are delayed: (Chart 3)

• 1. Loss of US $6 trillion by 2015, equivalent to 8 per cent
• f global GDP (Chart 4)
• 2. Cumulative loss in global output of US $16 trillion in

net present value (NPV) over the 2012-16 period

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Doing half the job could be even worse

The ugly solution occurs if adjustment is asymmetric:

• 1. Much larger losses over the near term if AEs front-load

fiscal consolidation without demand rotation (Chart 5)

• 2. NPV cumulative losses over the next five years

equivalent to $17.6 trillion, 10 per cent higher than the “bad” solution Exchange rate adjustment is an important part of the solution

6

Smaller, open economies caught in the middle

• Canada is a small open economy that plays by the rules

(Chart 6)

• Pressures from those who break the rules are displaced onto

more flexible currencies

• Effects of persistent large-scale intervention and capital

controls differ substantively from those of quantitative easing

• They target exchange rates directly and lead to zero-sum
• utcomes

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Charts

8

Chart 1: 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

Chart 2 - 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

Chart 3 - The “bad” solution: adjustments are delayed

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2004 2006 2008 2010 2012 2014 2016 2018 2020 0.80 0.90 1.00 1.10 1.20 1.30

Good solution Bad solution Data Projection

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

Index

The “bad” solution – Chinese real effective exchange rate Index: 2011Q3 = 1

Chart 4 - The “bad” solution: 6 trillion USD loss in global GDP by 2015

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The “bad” solution—GDP relative to the baseline scenario

Index: 2011Q3 = 1 2010 2011 2012 2013 2014 2015 0.85 0.90 0.95 1.00 1.05 World China United States Data Projection Index

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

Chart 5 - 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

Chart 6 - Adjustment has been displaced

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 60 80 100 120 140 160 180 Index Brazil China Canada

Real effective exchange rates

Index: 2002 Q1 = 100, quarterly data

Last observation: 2012Q4 Source: Bank for International Settlements

Quotes

15

What are the rules of the game?

Article IV, Section I, paragraph iii of the IMF’s Articles of Agreement states that members shall: “avoid manipulating exchange rates or the [international monetary system] in order to prevent effective balance of payments adjustments or to gain unfair competitive advantage over the members.”

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What are the rules of the game? (cont’d)

2007 Decision on Bilateral Surveillance over Members’ Policies broadened members’ obligations (paragraph14): “C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene.

• D. A member should avoid exchange rate policies that result

in external instability.”

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References

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References

• Carney, M. 2011.“Growth in the Age of Deleveraging.” Speech to the Empire Club
• f Canada/Canadian Club of T
• ronto, T
• ronto, Ontario, 12 December.
• de Resende, C., C. Godbout, R. Lalonde, É. Morin and N. Perevalov. 2012. “On

the Adjustment of the Global Economy.” Bank of Canada Review, (spring) 1-15.

• Lavigne, R. and S. Sarker. 2012 “The G-20 framework for strong, sustainable and

balanced growth: Macroeconomic coordination since the crisis,” Bank of Canada Review, (winter) 2012-2013.

• Murray, J. 2011. “With a Little Help from Your Friends: The Virtues of Global

Economic Coordination.” Speech to the State University of New York at Plattsburgh, Plattsburgh, New York, 29 November.

• Murray, J. 2012. “The Great Frustration: Hesitant Steps T
• ward Global Growth

and Rebalancing.” Speech to the New York Association for Business Economics, New York, New York, 27 November.

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