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Stabilizing an Unstable International Monetary System - Current and Historical Perspectives

Paper Session

Friday, Jan. 5, 2018 8:00 AM - 10:00 AM

Loews Philadelphia, Congress B
Hosted By: Union for Radical Political Economics
  • Chair: Ozgur Orhangazi, Kadir Has University

The Costs of Foreign Exchange Intervention

Devika Dutt
,
University of Massachusetts-Amherst

Abstract

Central Banks around the world increasingly intervene in the foreign exchange market for a variety of reasons, such as maintaining exchange rate stability. In fact, research shows that central banks can lean against the macroeconomic policy trilemma through maintaining reserves and intervening in the foreign exchange market, and secure policy space. However, securing this policy space can come at substantial costs. There are substantial costs associated both with building and holding reserves of foreign exchange and using reserves to intervene in the foreign exchange market. This paper seeks to estimate the costs of foreign exchange intervention undertaken by central banks around the world, and examine how these costs are affected by country characteristics. This paper examines the variation of the costs between advanced and developing countries, and the effect of policy tools on these costs. The paper also makes policy recommendations for mitigating the costs of foreign exchange intervention.

The Surprising Persistence of the Dollar: Can It Outlive Trumpism?

Gerald Epstein
,
University of Massachusetts-Amherst

Abstract

Abstract: The US dollar has remained the dominant key currency far beyond the expectations of most economists. This paper documents this persistence and explores the major reasons for the dollar's surprising staying power. These include the "global financial value chain" of global liquidity, speculation and shadow banking which is based on the dollar; the intervention role of the dollar used by major developing countries to stabilize their currencies at a competitive level; the vast military dominance of the US on a global scale and internal commitment to sustaining financial activity by the court system, the Federal Reserve and the US Treasury; and the vast stock of US government debt that provides a liquid and relatively safe form in which to hold dollar reserves. The paper then discusses the likely impact of Trumpism and Trumponomics on the international role of the dollar. Depending on the precise manifestation of Trumpism on the world stage and the domestic and international reactions to it, Trumpism could have either a net positive or strongly negative impact on the dollar. Much will also depend on choice made by the Chinese government, since the Yuan is the chief rival to the dollar's international role. Should the role of the dollar unravel, this could usher in a period of significant financial instability.

Towards a New Developmental Financial Architecture? The Global Crisis and Financial Innovations in the Developing World

Ilene Grabel
,
University of Denver

Abstract

The global financial governance architecture beyond the Bretton Woods institutions (BWIs) has been the site of extraordinary innovations over the past decade or so and especially during the global crisis. Institutions that provide liquidity support and those that provide long-term development and/or infrastructure finance in EMDEs at the national/bilateral/sub-regional/regional/trans- regional levels are transforming the financial landscape. Existing institutions have been given new life, and new institutions have been created. Taken together, these innovations increase the heterogeneity, complexity, and density of the financial governance landscape. Redundancy and new networks of cooperation among institutions may increase resilience and anti-fragility. Equally important, the initiatives promise to widen policy space for development. These institutional innovations do not coalesce around a unified architecture that rivals the BWIs. But the emerging institutional landscape complicates the terrain in which the BWIs operate; affords EMDE policymakers greater voice than is available at the BWIs; increases EMDE exit options and leverage at the BWIs by increasing the opportunity for forum shopping; and creates opportunities for unscripted learning by doing and learning from others. To the extent that opportunities for forum shopping are realized, the BWIs may face pressure to respond to long-held concerns by EMDEs. The developments surveyed are enormously promising experiments that reflect pragmatic adaptation to circumstances confronted by EMDE policymakers.

Recovery from Financial Crises in Peripheral Economies, 1870-1913

Peter Bent
,
University of Massachusetts-Amherst

Abstract

What drives recoveries after financial crises? I address this question for the 1870-1913 “first era of globalization,'' a period when international economic integration meant that terms of trade movements could have significant nation-level impacts, but before governments were engaged in widespread economic management. Protectionism was one of the few economic policy options available at this time. The impacts of these two factors – terms of trade and tariff rates – over this period have been studied before. Previous studies have found negative relationships between terms of trade volatility and GDP. The findings for tariffs have been more contentious, with some studies finding positive relationships with GDP growth over this period while others find negative results. But these studies have not looked specifically at how these factors influenced recoveries from financial crises. Using local projection methods, I find that tariff shocks had a positive impact on GDP in post-crisis periods, while terms of trade shocks had a slightly negative impact. This suggests that governments, through tariff policies, played a more significant role in shaping economic outcomes during this period than is typically recognized.

Does Sterilized Central Bank Intervention Have Long Term Effects on Exchange Rates? The Case of the British Exchange Equalization Account, 1952-1972

Alain Naef
,
University of Cambridge

Abstract

Using over 40,000 new observations on intervention and exchange rates, this paper is the first study of Bank of England foreign exchange intervention between 1952 and 1972. The main finding is that the Bank was unsuccessful in managing the exchange rate in the long run. By estimating a reaction function, I find that the Bank of England failed to intervene on the forward market which was growing in importance. Analyzing alternative exchange rates, I show how the Bank failed to maintain credibility in offshore markets. This lack of control led to window dressing of the reserve accounts figures and eventually the demise of the Bretton Woods fixed exchange rate system in Britain.
Discussant(s)
Gerald Epstein
,
University of Massachusetts-Amherst
Ilene Grabel
,
University of Denver
Peter Bent
,
University of Massachusetts-Amherst
Devika Dutt
,
University of Massachusetts-Amherst
Alain Naef
,
University of Cambridge
JEL Classifications
  • F3 - International Finance
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit