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Capital Flows in the International Monetary System

Paper Session

Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM

Marriott Philadelphia Downtown, Liberty Ballroom Salon B
Hosted By: American Economic Association
  • Chair: Jonathan D. Ostry, International Monetary Fund

International Monetary and Financial Relations in the 21st Century

Maurice Obstfeld
,
International Monetary Fund
Alan M. Taylor
,
University of California-Davis

Abstract

The present international monetary and financial system grew out of the wreckage of the Great Depression and has evolved beyond recognition over the postwar period. Along the way, the system has become increasingly crisis-prone, its growing vulnerability culminating in a global crisis in 2007–09 and the resulting aftershocks. Rather than recovering broadly and robustly, global economic growth has become increasingly tepid, revealing new strains as policymakers have acted to support national economies subject to their domestic constraints. In turn, those strains have led to ever-louder calls for rethinking. How did we get here? What do current tensions say about the future of international integration? Our thesis will be that the Bretton Woods agreement covered only a constricted set of issues; a wider set of financial-stability challenges was not addressed. These latent dangers had been of central importance pre-World War II, and returned to importance again as the decades passed.

Exchange Rates and the Transmission of Global Liquidity

Hyun Song Shin
,
Bank for International Settlements
Stefan Avdjiev
,
Bank for International Settlements
Catherine Koch
,
Bank for International Settlements

Abstract

Exchange rate fluctuations influence economies not only through a net exports channel, but also through a financial amplification channel. While the trade-weighted effective exchange rate is key for the net exports channel, financial amplification rests on risk-taking and leverage associated with shifts in the bilateral exchange rate against international funding currencies. We examine the impact of fluctuations in the US dollar, the euro and the yen on cross-border bank lending. While the US dollar remains the preeminent global funding currency, the yen also exhibits many similar characteristics. Meanwhile, the euro has recently also emerged as an international funding currency.

Capital Flow Cycles: A Long, Global View

Carmen Reinhart
,
Harvard University
Vincent Reinhart
,
Standish Mellon Asset Management
Christoph Trebesch
,
Kiel Institute for the World Economy

Abstract

This paper develops a new, extensive database on international capital flows over the past 200 years by combining long-run data on international debt issuance, the current account, and central bank reserves across countries. We show that cross-border financial flows from financial centers to the periphery are cyclical, with similar patterns over time. We document the interaction between the capital flow cycle, the commodity price super-cycle, and short-term interest rates. All three cycles are connected to the occurrence of financial crises, particularly sovereign defaults. We also offer an encompassing explanation of financial conditions at the world’s financial centers. The most recent cycle, starting with the surge in capital flows to emerging markets during 1999-2011, and its subsequent reversal is re-examined in the context of this 200-year history. In the event, many emerging market economies fared better than history predicts from the double bust in capital flows and commodity prices.

Managing the Tide: How Do Emerging Markets Respond to Capital Flows?

Atish R. Ghosh
,
International Monetary Fund
Jonathan D. Ostry
,
International Monetary Fund
Mahvash S. Qureshi
,
International Monetary Fund

Abstract

This paper examines whether—and how—emerging market economies (EMEs) respond to capital flows to mitigate their untoward consequences. Based on a sample of about 50 EMEs over 2005Q1–2013Q4, we find that EME policy makers respond proactively to capital inflows by using a combination of policy tools: central banks raise the policy interest rate to address economic overheating concerns; intervene in the foreign exchange market to resist currency appreciation pressures; tighten macroprudential measures to dampen credit growth; and deploy capital inflow controls in the face of competitiveness and financial-stability concerns. Contrary to conventional policy advice to EMEs, we find no evidence of counter cyclical fiscal policy in the face of capital inflows. Overall, policies are more likely to respond, and used in combination, during inflow surges than in more normal times.
Discussant(s)
Harold James
,
Princeton University
Linda Goldberg
,
Federal Reserve Bank of New York
Francis Warnock
,
University of Virginia
Eduardo R. Borensztein
,
Borensztein Consulting
JEL Classifications
  • F3 - International Finance
  • F4 - Macroeconomic Aspects of International Trade and Finance