Global imbalances and prospects for the world economy

Most explanations of the current economic and financial crisis focus on its financial causes. Often missing in these explanations is a discussion of how the seeds of the crisis were sown by economic policies in major countries that fostered the growth of global imbalances during the 2000s. Moreover, just as these imbalances created the current crisis, exactly how they are likely to unwindor fail to be resolvedover the period immediately ahead will play a major role in determining the prospects for world economic recovery and the pace of future growth. Largely reflecting economic policies, substantial imbalances in savings and investment emerged among major world economies after 2000, and these imbalances were reflected in growing current account imbalances. Rising U.S. deficits and increasing surpluses in emerging East Asian economies (especially China) and oil-exporting countries in the Middle East developed. The underlying savings and investment imbalances gave rise to a savings glut in developing countries and spawned sizable net capital flows to the advanced countries, with the United States being the primary recipient. This glut of savings contributed to a substantial reduction in world interest rates. At the same time, a significant rise in demand for official reserve assets (largely in the form of U.S. Treasury and Agency securities), especially by East Asian and Middle Eastern economies, crowded out private demand for such high-quality, low-risk assets. Consequently, a scramble by private investors to try to find other higher yielding but low risk assets contributed to the financial excesses that finally culminated in the turmoil that gripped world financial markets in late 2008 and early 2009.global financial crisis, Macroeconomic Policy, economic growth, Global Imbalances

Global imbalances and prospects for the world economy

Most explanations of the current economic and financial crisis focus on its financial causes. Often missing in these explanations is a discussion of how the seeds of the crisis were sown by economic policies in major countries that fostered the growth of global imbalances during the 2000s. Moreover, just as these imbalances created the current crisis, exactly how they are likely to unwind—or fail to be resolved—over the period immediately ahead will play a major role in determining the prospects for world economic recovery and the pace of future growth. Largely reflecting economic policies, substantial imbalances in savings and investment emerged among major world economies after 2000, and these imbalances were reflected in growing current account imbalances. Rising U.S. deficits and increasing surpluses in emerging East Asian economies (especially China) and oil-exporting countries in the Middle East developed. The underlying savings and investment imbalances gave rise to a “savings glut” in developing countries and spawned sizable net capital flows to the advanced countries, with the United States being the primary recipient. This glut of savings contributed to a substantial reduction in world interest rates. At the same time, a significant rise in demand for official reserve assets (largely in the form of U.S. Treasury and Agency securities), especially by East Asian and Middle Eastern economies, crowded out private demand for such high-quality, low-risk assets. Consequently, a scramble by private investors to try to find other higher yielding but low risk assets contributed to the financial excesses that finally culminated in the turmoil that gripped world financial markets in late 2008 and early 2009.Global Financial Crisis, Macroeconomic Policy, Economic Growth, Global Imbalances

Dealing with Capital Inflows Are There Any Lessons?

We have now witnessed more than half a decade of relatively heavy capital inflows to a large group of highly heterogeneous developing countries and economies in transition in Asia, Eastern Europe, the Former Soviet Union, Latin America, and parts of Africa and the Middle East—in effect, we have already seen the reversal of these flows in a number of cases. In light of the richness of the country experiences and the continued relevance of the topic in a world of increasingly integrated capital markets, our aim in this paper is threefold: first, to chronicle the policies adopted in a broad range of countries, so as to document who did what and when; second, to try to assess to what extent such policies achieved their intended objectives and; lastly following from the previous two points, to draw lessons about which policies appeared to have been the most successful tools in coping with surging capital inflows, with emphasis on the 'policy mix' and how individual measures interact. In this retrospective review of the policy response to the surge in capital inflows we find crucial importance of the interaction of policies to either magnify or reduce the volume of inflows, affect their composition, and/or alter their macroeconomic consequences. For example, a combination of little or no short-term exchange rate uncertainty (as is the case when there is an implicit or explicit peg), sterilized intervention, which tends to prevent domestic short-term interest rates from converging toward international levels, and no binding impediments to capital inflows (through either taxation or quantitative constraints) is likely to maximize the volume of short-term capital inflows a country receives (this policy mix characterizes the Mexican experience during 1990-93 reasonably well). The pairing of little or no short-term exchange rate risk and relatively high domestic interest rates favors the short-term investor; for the long-term investor, there is always exchange rate risk since over longer horizons the probability of a realignment of the peg or a change in the exchange rate regime increases. Further, longer-term investments (such as foreign direct investment) tend to be less interest sensitive. Hence, it would not be surprising to see that if such a policy mix remains in place for any extended period of time it may end up skewing the composition of inflows toward the short end of the maturity spectrum. Similarly, it could be argued that the mix of sterilized intervention and controls on inflows may undermine the 'individual effectiveness' of these policies. The comparatively high interest rate differentials that usually accompany sterilization may act as an inducement to circumvent the capital controls (i.e. firms and banks may find ways of borrowing offshore). To the extent that they are successful in dodging the controls, this tends to offset some of the contractionary effects of the sterilization efforts (this is case of Brazil in 1994-95). Along the same lines, liberalizing controls on outflows as a policy aimed at reducing net capital inflows may backfire if domestic interest rates are high relative to international levels and/or if it is interpreted a positive signal of the future economic/policy environment. Indeed, several countries (Chile, Malaysia, and Thailand) liberalized outflows while at the same time engaging in substantive sterilization efforts

The Cost of Trade Restraints: The Case of Japanese Automobile Exports to the United States (Le coût des obstacles au commerce: étude du cas des exportations d'automobiles japonaises aux Etats-Unis) (El costo de las limitaciones del comercio: El caso de la exportación de automóviles japoneses a los Estados Unidos)

This paper assesses the extent to which restraints on exports of Japanese automobiles to the United States affected car sales and prices in the period 1981-84. The estimates are obtained using a model of the U.S. automobile sector that explicitly allows for the effects of the quotas on the average quality of cars purchased. By distinguishing between pure price effects and quality effects, it is possible to assess the welfare costs and income transfers resulting from the imposition of the restraints. The results presented in the paper suggest that the restraints had a substantial impact. The average transactions price for all new automobiles in the United States increased by nearly 50 percent over the period 1981-84, compared with an increase of 27 percent which would have been expected in the absence of the quotas. The higher prices resulted from a combination of "pure" price increases and improvements in quality. Sales were reduced by 4 million units during 1981-84 as a result of the quotas, while the value of expenditures was raised by $5¼ billion as increases in prices more than offset the effects of the restraints on the number of cars sold. At the same time, the quotas served to increase the market share of the U.S. industry, and expenditures on U.S. automobiles were$17½ billion higher than they otherwise would have been. The rise in new automobile prices (adjusted to exclude price increases owing to changes in quality) induced by the export restraints is estimated to have cost purchasers nearly $17 billion during the four-year period. Of this increase in purchasers' costs,$6-12 billion represented a transfer to the U.S. automobile industry, and the remaining $5-11 billion is accounted for by a transfer to foreign producers and a deadweight loss to purchasers. /// Les auteurs de la présente étude évaluent l'effet des restrictions imposées aux exportations d'automobiles japonaises à destination des Etats-Unis, à la fois sur les ventes de voitures et sur leur prix au cours de la période 1981-84. Ils ont établi leurs estimations à partir d'un modèle qui décrit le secteur de l'automobile aux Etats-Unis, et qui prend explicitement en compte l'impact des contingents sur la qualité moyenne des véhicules achetés. En distinguant les purs effets de prix des effets de qualité, il est possible d'évaluer le coût social de ces restrictions, ainsi que les transferts de revenu qu'elles entraînent. Les résultats de leurs travaux amènent les auteurs de l'étude à estimer que ces restrictions ont eu un effet considérable. Aux Etats-Unis, le prix moyen des transactions portant sur l'ensemble des voitures neuves a augmenté de près de 50$5.250 millones, ya que la subida de los precios contrarrestó con creces las consecuencias de la disminución del número de automóviles vendidos. A la vez, la fijación de cuotas provocó el aumento de la proporción correspondiente a la industria automovilística estadounidense en el mercado, y el gasto en automóviles estadounidenses superó en $17.500 millones el nivel que se hubiera alcanzado de no haber existido cuotas. Se estima que en el cuatrienio en cuestión el aumento de precio de los automóviles nuevos (ajustado de manera de excluir los aumentos provocados por variaciones de calidad) inducido por limitaciones impuestas a la exportación costó a los consumidores casi$17.000 millones. De ese aumento, un total comprendido entre $6.000 millones y$12.000 millones representó una transferencia a la industria automovilística estadounidense, y el resto --comprendido entre $5.000 millones y$11.000 millones-- constituyó una transferencia a los productores extranjeros y una pérdida para los compradores.

Estimating China's "Equilibrium" Real Exchange Rate

The number of studies attempting to estimate the "equilibrium" real value of China''s currency has proliferated in recent years as the country''s presence in world markets has grown. These studies have sought to establish whether or not a significant part of China''s competitive prowess can be attributed to the foreign exchange value of the renminbi. Unfortunately, no consensus has emerged because the studies yield a very wide range of estimates. The paper looks at a sample of these studies, with estimates of undervaluation ranging from zero to nearly 50 percent. It attributes the wide variation in these estimates to the influence of such factors as the different methodologies used, explanatory variables included, subjective judgments of the various researchers in deriving their results, and instability in underlying economic relationships, especially in a rapidly developing economy like China.Exchange rates;Purchasing power parity;exchange rate, real exchange rate, current account balance, trade model, balance of payments, equilibrium exchange rate, effective exchange rate, real effective exchange rate, foreign exchange, current accounts, terms of trade, trading partners, per capita income, exchange rate regimes, real exchange rates, external position, nominal exchange rate, world markets, equilibrium ? exchange rate, exchange rate policies, bilateral real exchange rate, international trade, world trade, partial equilibrium, world economy, movements in exchange rates, domestic prices, trade effect, transition economies, exchange rate change, partner countries, producer price index, exchange rate changes, trade effects, exchange rate dynamics, prevailing exchange rate, exchange rate arrangement, fixed exchange rate, trade regime

Pension Reform in China

The rapid aging of China''s population over the next few decades makes it important for a new pension system with broad and adequate coverage to be put in place quickly. Pension reforms, first initiated in 1997, have become bogged down in difficulties over dealing with the "legacy costs" associated with the relatively more generous benefits provided under the old system. This paper argues that a way forward is to separate the legacy problem from the problem of setting up a new pension system, and it suggests concrete proposals for setting up such a new system which would cover both urban and rural workers.Pension funds;pension, pension system, retirement, benefits, individual accounts, wages, social pension, pensions, retirement age, replacement rate, early retirement, life expectancy, pension reform, retirement income, wage, national pension, contribution rates, dependency ratio, pension administration, pension plan, replacement rates, labor force, pension systems, individual account, payroll, level of retirement income, pillar pension, wage rate, salaries, public pension, retirement period, average pensions, public pensions, future pensions, retirement policy, pension contributions, maternity benefits, pension reforms, basic pension, public pension reform, current pension, defined contribution ? system, wage rates, aging population, employer pension, public pension system, provident fund, pension benefits, average pension, pension policy, voluntary pension, payroll tax, minimum benefit, pension pooling, pension system reform, occupational schemes, multi-pillar pension system, contribution period, defined benefit, pension plans, contribution ? system, accumulated savings, pension costs, pension program, pillar system, pension obligations, health care, pension liabilities, payroll taxes, pension entitlements, pension coverage, basic pensions

Descriptions of improvisational thinking by expert musicians trained in different cultural traditions

Research about improvisation often focuses on one musical tradition. The current study investigated descriptions of thinking behind improvisation in different cultural traditions through interviews with advanced improvisers residing in a metropolitan area in the United States. The participants were rigorously trained in their tradition and have performance experience within it. However, as immigrants they are experienced in communicating with Western audiences and conversant in Western ways of thinking about music. Immediately after completing the improvisation, each participant listened to a recording and looked at its visual representation, while describing the underlying thinking. The visual representation showed pitch contour and note length without reference to any notational system. A thematic analysis revealed eight main themes: Licks and Conventions describe how prelearned material and convention guided creation; Reaction, Forward Looking, and Repetition & Variety outline various processes that shape creation in the moment; and Aesthetics, Communication, and Emotion provide clues to the improvisers’ motivation behind choices. Interestingly, the use of prelearned patterns appear to facilitate improvisations in all the traditions represented. This and other identified strategies appearing cross-culturally may be shaped by shared cognitive constraints. These shared strategies may also facilitate understanding as educators broaden their curricula to multiple musical traditions

An Approach to Long-Term Fiscal Policy Analysis

This paper proposes an approach to setting fiscal policy that factors in the longer-term budgetary pressures that countries face owing, in particular, to population aging and rising health care costs. The approach attempts to overcome the difficulties in evaluating economic trade-offs and social welfare over extended periods. Long-term fiscal projections from the "Intergenerational Report" published as part of the Australian budget in May 2002 are used in a simple model of the Australian economy to illustrate some of the longer-term trade-offs that need to be considered in framing budgets over the medium term. These illustrative simulations, in particular, point out the importance of smoothing fiscal adjustment over time and, hence, the need for careful planning. Smoothing fiscal adjustment, however, raises a new set of questions regarding burden sharing across generations and what costs should be shared.Health care;Economic models;fiscal policy, fiscal adjustment, fiscal pressures, expenditures, fiscal costs, social expenditure, fiscal policy formulation, fiscal adjustment over time, fiscal adjustments, public expenditures, fiscal policy framework, public debt, fiscal projections, fiscal policy adjustments, expenditure, fiscal gaps, tax income, fiscal rule, fiscal policy action, aggregate demand, cutting expenditures, fiscal policy rule, fiscal policy decisions, budget balance, budget deficit, government expenditures, medium-term fiscal strategy, budget balances, fiscal policy rules, government spending

How Robust Are Estimates of Equilibrium Real Exchange Rates

Increased attention is being paid to assessments of the actual values of countries'' real exchange rates relative to their "equilibrium" values as suggested by "fundamental" determining factors. This paper assesses the robustness of alternative approaches and models commonly used to derive equilibrium real exchange rate estimates. Using China''s currency to illustrate this analysis, the variance in estimates raises serious questions regarding how robust the results are. The basic conclusion from the tests used here is that, at least for China, small changes in model specifications, explanatory variable definitions, and time periods used in estimation can lead to very substantial differences in equilibrium real exchange rate estimates. Thus, such estimates should be treated with great caution.Exchange rates;Economic models;exchange rate, real exchange rate, equation, current account balance, real exchange rates, real effective exchange rate, effective exchange rate, equilibrium exchange rate, mean group, correlation, econometrics, foreign exchange, data analysis, equations, time series, independent variable, covariance, cointegration, official exchange rate, statistics, real effective exchange rates, normal distribution, estimation technique, exchange rate need, equilibrium ? exchange rate, asymptotic normal distribution, asymptotic distribution, exchange rate adjustment, cross-country variation, exchange rate movements, estimation period, effective exchange rates, exchange rate policies, estimation of short-run coefficients, arithmetic, exchange rate dynamics, current accounts