View
1
Download
0
Category
Preview:
Citation preview
The Trilemma: Insights and Limitations
Menzie D. ChinnUniversity of Wisconsin, Madison
and NBER
Universität Leipzig/Universität Duisburg Essen Conference on
“Exchange Rates, Monetary Policy and Financial Stability”
October 13, 2014Leipzig
-.5
-.4
-.3
-.2
-.1
.0
.1
M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 M1 M2
2013
India
S.Africa
Turkey
Thailand
Brazil
Argentina
Log exchangerates against USD,2013M05=0
(1/24)
2
Remember Currency Wars? Remember the Taper Tantrum?
3
Outline
1. Progress in Measuring the Trilemma
2. The Evolution of the Trilemma, and Reserves
3. Reserve Accumulation, Again4. Trilemma or Dilemma?
4
The Trilemma, aka “The Impossible Trinity”
5
Measuring the Trilemma GoalsMonetary Independence
MI = 21),(
1
ji iicorr
where i refers to home countries and j to the base country.
Exchange Rate Stability
))_(log((01.001.0
rateexchstdev ERS
Financial Openness KAOPEN = Chinn-Ito (2006) index of capital account openness, based on
the information in IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions
All three indexes are normalized b/w 0 and 1. For all indexes, higher values indicate higher extents of achievement in each of the three policy goals.
Alternative Measures: Capital Openness
6Source: Quinn, Schindler, and Toyoda (2011)
Schindler
Chinn-Ito
Persistence (or Gates vs. Walls)
7
Indices for Industrial Countries
8
Indices for Emerging Markets
9
Indices for Less Developed Countries
10
Indices for Emerging Asia
11
Indices for Developing Asia
12
Indices for Latin America
13
Indices for Less Developed Countries ex.-Asia
14
How Do Reserves Fit In?
Trilemma measures are not perfect representations
Reserves can be accumulated in order to (temporarily) escape the trilemma
15
16
Emerging Asian Economies
Monetary Independence
Exchange Rate Stability
International Reserves/GDP
Financial Integration.2
.4
.6
.8
1
1971-801981-90
Note: This sample includes Taiwan, HK, Indonesia, Korea, Malaysia, Philipines, Singapore, Thai land, China
Emerging Asian Economies
1991-20002001-08
(Up to 2007)
17
Emerging Asian Economies: 1971-80
Monetary Independence
Exchange Rate Stability
International Reserves/GDP
Financial Integration.2
.4
.6
.8
1
1971-801981-90
Note: This sample includes Taiwan, HK, Indonesia, Korea, Malaysia, Philipines, Singapore, Thai land, China
Emerging Asian Economies
1991-20002001-08
(Up to 2007)
18
Emerging Asian Economies: 1971-90
Monetary Independence
Exchange Rate Stability
International Reserves/GDP
Financial Integration.2
.4
.6
.8
1
1971-801981-90
Note: This sample includes Taiwan, HK, Indonesia, Korea, Malaysia, Philipines, Singapore, Thai land, China
Emerging Asian Economies
1991-20002001-08
(Up to 2007)
19
Emerging Asian Economies: 1971-2000
Monetary Independence
Exchange Rate Stability
International Reserves/GDP
Financial Integration.2
.4
.6
.8
1
1971-801981-90
Note: This sample includes Taiwan, HK, Indonesia, Korea, Malaysia, Philipines, Singapore, Thai land, China
Emerging Asian Economies
1991-20002001-08
(Up to 2007)
20
Emerging Asian Economies: 1971-2008
Monetary Independence
Exchange Rate Stability
International Reserves/GDP
Financial Integration.2
.4
.6
.8
1
1971-801981-90
Note: This sample includes Taiwan, HK, Indonesia, Korea, Malaysia, Philipines, Singapore, Thai land, China
Emerging Asian Economies
1991-20002001-08
(Up to 2007)
21
Emerging Asia ex.-China, and China
Monetary Independence
Exchange Rate Stability
International Reserves/GDP
Financial Integration
.2
.4
.6
.8
1
EMG Asia: 1990-96
EMG Asia: 1997-2000EMG Asia: 2001-06
China: 1990-96China: 1997-2000China: 2001-06
Note: The Emerging Asian Economies sample includes Indonesia, Korea, Malaysia, Philipines, and Thailand
Emerging Asian Economies and China
22
Emerging Latin America
includes Argentina, Brazil, Chile, Colombia, Ecuador, Jamaica, Mexico, Peru, Trinidad and Tobago, and Venezuela.
Monetary Independence
Exchange Rate Stability
International Reserves/GDP
Financial Integration.2
.4
.6
.8
1
1971-801981-90
Center is at 0
Emerging Latin America
1991-20002001-08
(Up to 2007)
23
Emerging LatAm: 1971-80
Monetary Independence
Exchange Rate Stability
International Reserves/GDP
Financial Integration.2
.4
.6
.8
1
1971-801981-90
Center is at 0
Emerging Latin America
1991-20002001-08
(Up to 2007)
24
Emerging LatAm: 1971-90
Monetary Independence
Exchange Rate Stability
International Reserves/GDP
Financial Integration.2
.4
.6
.8
1
1971-801981-90
Center is at 0
Emerging Latin America
1991-20002001-08
(Up to 2007)
25
Emerging LatAm: 1971-2000
Monetary Independence
Exchange Rate Stability
International Reserves/GDP
Financial Integration.2
.4
.6
.8
1
1971-801981-90
Center is at 0
Emerging Latin America
1991-20002001-08
(Up to 2007)
26
Emerging LatAm: 1971-2008
“Emerging Latin America” include Argentina, Brazil, Chile, Colombia, Ecuador, Jamaica, Mexico, Peru, Trinidad and Tobago, and Venezuela.
Monetary Independence
Exchange Rate Stability
International Reserves/GDP
Financial Integration.2
.4
.6
.8
1
1971-801981-90
Center is at 0
Emerging Latin America
1991-20002001-08
(Up to 2007)
27
Evolution over Time Gradual, but steady increase in financial
integration among LDCs over the last 20 years Since the 1990s, emerging market countries
converged to the “middle-ground,” which means they pursued, along with financial liberalization, Managed exchange rate flexibility Medium level of monetary independence Sizable increase in IR holding
Emerging Asian economies differ from other groups with their balanced targeting and high levels of IR holdings
28
Punctuated Equilibria
Find structural breaks in the series of the indexes corresponding to major economic events
the collapse of the BW system
debt crisis of 1982
Asian crisis of 1997-98
the emergence of rapid globalization (1990) and the rise of China (2001)
Countries do alter policy configurations when they experience major shocks
Reserves, Again
29
Differing Paths
30Source: Bussiere, Chen, Chinn and Lisack (2014)
Insurance against GDP Loss
31Source: Bussiere, Chen, Chinn and Lisack (2014)
Insurance against GDP Loss
A doubling of the reserves-to-ST debt ratio is associated with a 0.4 to 0.5 percentage point faster growth rate during the global recession
32
A Global Financial Cycle?
33Rey, 2013
aka Trilemma or Dilemma?
Rey (2013) argues that in a financially integrated world, floating exchange rates do not insulate
Capital flow surges induce credit booms in the global financial cycle
Indisputable there are cycles But are exchange rate regimes
irrelevant, as Rey says?34
But Pegs Do Matter: Response to Base Country Interest Rate
35Klein and Shambaugh 2013
Still, the Trilemma Misses a Lot
The Trilemma is consistent with Mundell-Fleming
Intertemporal concerns not accounted for
Nor are credibility issues Like Mundell-Fleming, the banking
system is missing ==> New project: Aizenman,
Chinn, Ito (2014)36
2-step Process (a la Forbes-Chinn 2003): Step 1 estimate γ’s
37
RF : a return in local country ZG : global factors - Policy rates, oil, commodity, gold- VIX, Ted Xc : corresponding return Y : local factor (y/y IP growth)
Step 2 – Relate γ’s to Policies, Conditions, Institutions
OMP: Open Macro Policies - ERS, KAOPEN, reserve accumulation
MC: Macro conditions – infl. vol., CA, public finances (budget deficit or debt)
LINK: Imports, bank lending, FDI, trade competition
INST: ICRG based indicator CRISIS: currency and banking 1987(1993)-2012, 5 yr panels, 100
countries38
39
40
41
42
43
44
45
46
Other Links
Effective exchange rates Sovereign bond yields Financial stress Policy rates accounting for ZLB Exchange market pressure as a
function of global factors (incl. VIX, Ted)
47
Some Preliminary Observations
The Trilemma is a very useful framework
But it does seem to miss a lot of factors
There is more “friction” than we teach our students, but
It’s too soon to dispense with it
48
Recommended