The Case for Exchange Rate Flexibility in Oil-Exporting Economies

High oil prices are again transforming oil-exporting countries. With oil trading at $90 a barrel, government coffers in these countries are overflowing with the oil windfall, and stock markets there are booming. However, one feature of these oil exporters has not changed: their propensity to peg to the dollar. Large oil-exporting economies that border the Persian Gulf peg to the dollar even more tightly than China does while some others peg to a basket of currencies of oil-importing countries--mainly the dollar and the euro. These economies are making a policy mistake. They would be better served by a currency regime that assures their currencies depreciate when the price of oil falls and appreciate when the price of oil rises. Those that lack the institutions to conduct an autonomous monetary policy should peg to a basket that includes the price of oil. Exchange rate flexibility would reduce the need for domestic prices in the oil-exporting economies to rise and fall along with the price of oil, create additional room for monetary policy to reflect domestic conditions, and help oil-exporting economies manage the large swings in government revenue that accompany large swings in the oil price. The time has come to decouple the currencies of large oil-exporting economies from the dollar.

Count the Limbs: Designing Robust Aggregation Clauses in Sovereign Bonds

On August 29, 2014, the International Capital Market Association (ICMA) published new recommended terms for sovereign bond contracts governed by English law. One of the new terms would allow a super majority of creditors to approve a debtor’s restructuring proposal in one vote across multiple bond series. The vote could bind all bond holders, even if a series voted unanimously against restructuring, so long as enough holders in the other series voted for it. An apparently technical change, awkwardly named “single-limb aggregated collective action clauses (CACs)” promised to eliminate free-riders for the first time in the history of sovereign bond restructuring. It could also open up new possibilities for abuse. The markets might have rebelled. Instead, they yawned … and proceeded to adopt the new terms. We consider why such consequential contract change met with less resistance than its relatively modest predecessors, series-by-series and two-limb aggregated CACs. We focus on contract design, and the process by which it came about. Most of the essay is devoted to analyzing the key features of single-limb aggregated CACs and the considerations that shaped decisions about these features. We conclude with observations on contract reform in sovereign debt restructuring and the challenges ahead

Argentina's problems went far beyond the absence of a strict currency board: Comment on Schuler

KURT SCHULER ARGUES MOST ECONOMISTS (MYSELF INCLUDED) failed to get the facts right. Schuler writes, “economists whose work in other areas I admire failed to do the research necessary for understanding Argentina’s situation accurately. As a result their analysis was faulty†(Schuler 2005, 235). This mischaracterization of Argentina’s economic situation led them to prescribe inappropriate policies, not the least recommending that Argentina end its tight link to the dollar.

The Chinese Conundrum: External Financial Strength, Domestic Financial Weakness

China's recent investment boom looks much like the investment boom in the Asian tigers of the 1990s. Both were marked by a surge in bank credit to the private sector, a real estate boom and questions about the quality of domestic financial intermediation. Yet, China has few of the external vulnerabilities that marked the Asian tigers. Its current account surplus is rising, and its reserves far exceed its short-term external debt. However, China's external strength is unlikely to allow it to avoid future banking trouble and a new round of costly non-performing loans. The trigger for the next generation of bad loans in China, though, will not be sudden withdrawal of external credit (JEL classification: F32, G21). Copyright 2006, Oxford University Press.

The Strategic Consequences of the Global Financial and Economic Crisis. ESF Working Paper No. 31, 18 March 2009

The latest in the series of European Security Forum papers brings together the presentations given at a Forum on the The Strategic Consequences of the Global Financial and Economic Crisis held at CEPS in February 2009. Five distinguished speakers from the US, Russia, China and Europe consider the implications of the crisis for their countries and the rest of the world

Pathways through Financial Crisis: Argentina Understanding Pathways through Financial Crises and the Impact of the IMF

Political support for Argentina\u27s currency board rested on distributing the early gains from ending hyper-inflation and the spending made possible with access to external credit. When these gains were exhausted and external shocks left the peso overvalued, neither Argentina\u27s political system nor its economy could adjust. The needed adjustment went well beyond simple fiscal tightening: it required deciding who would incur the financial losses associated with the deep contraction needed to correct a real over-valuation in a heavily indebted economy. By 2000, Argentina faced the prospect of further economic contraction, a banking crisis and an external sovereign debt crisis. Even if none of the three crises was avoidable, preemptive action might have made one or more of them less severe. Yet preemption was a political orphan - no political constituency in Argentina argued to bring some pain forward for a chance of less pain down the road, and the IMF and G-7 preferred continued financing to the political risk of supporting a new macroeconomic strategy

Pathways through Financial Crisis: Argentina Understanding Pathways through Financial Crises and the Impact of the IMF

Political support for Argentina\u27s currency board rested on distributing the early gains from ending hyper-inflation and the spending made possible with access to external credit. When these gains were exhausted and external shocks left the peso overvalued, neither Argentina\u27s political system nor its economy could adjust. The needed adjustment went well beyond simple fiscal tightening: it required deciding who would incur the financial losses associated with the deep contraction needed to correct a real over-valuation in a heavily indebted economy. By 2000, Argentina faced the prospect of further economic contraction, a banking crisis and an external sovereign debt crisis. Even if none of the three crises was avoidable, preemptive action might have made one or more of them less severe. Yet preemption was a political orphan - no political constituency in Argentina argued to bring some pain forward for a chance of less pain down the road, and the IMF and G-7 preferred continued financing to the political risk of supporting a new macroeconomic strategy