Embed Size (px)
Citation preview
1
Macroeconomic Management with Open Capital Accounts
Khor Hoe EeAssistant Managing Director
Monetary Authority of SingaporePresentation at IMF High Level Seminar on Crisis
Prevention in Emerging Markets, 10 Jul 2006
Presentation Outline
•• The Open Economy The Open Economy TrilemmaTrilemma
•• The Post The Post BrettonBretton Woods Period Woods Period –– Increased Increased magnitude and volatility of capital flowsmagnitude and volatility of capital flows
•• AsiaAsia’’s response s response –– strengthening of financial strengthening of financial systems, capital account restrictions, FX systems, capital account restrictions, FX intervention, reserves accumulation, intervention, reserves accumulation, macroeconomic credibilitymacroeconomic credibility
•• Policy issuesPolicy issues
2
Open Capital Accounts
Fixed FX Rates Monetary Autonomy
Open Capital Account + Monetary AutonomyOpen Capital
Account + Fixed Forex Rates
Monetary Autonomy + Fixed
Forex Rates
When capital accounts are open, policymakers can either control the exchange rate OR the interest rate, but not both
The Open Economy Trilemma
The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies and Capital Mobility (Obstfeld, Shambaugh & Taylor, 2005)
•• Analyses the validity of the Analyses the validity of the TrilemmaTrilemma worldwide, across 3 historical worldwide, across 3 historical periods over 130 yearsperiods over 130 years
•• Key Findings of the study:Key Findings of the study:–– Classical Gold Standard (1870Classical Gold Standard (1870--1913) : Rapid transmission of interest 1913) : Rapid transmission of interest
rate shocks fixed exchange rate episodesrate shocks fixed exchange rate episodes–– BrettonBretton Woods (1959Woods (1959--1973) : High degree of monetary autonomy with 1973) : High degree of monetary autonomy with
fixed exchange rates. However as capital controls became more fixed exchange rates. However as capital controls became more porous in the 1960s, the combination of fixed exchange rates andporous in the 1960s, the combination of fixed exchange rates andmonetary independence became untenable.monetary independence became untenable.
–– PostPost--BrettonBretton Woods (1974Woods (1974--present): Countries with fixed exchange present): Countries with fixed exchange rates lose considerable monetary independence, whereas those witrates lose considerable monetary independence, whereas those with h floating regimes have some monetary autonomyfloating regimes have some monetary autonomy..
The Trilemma has been validated in history
The analysis validates the Trilemma as a binding condition which holds over a long span of economic history
3
The Post Bretton Woods Period – Increased magnitude and volatility of capital flows (1)
Source: IMF
-100-50
0
50100150200
250300350
1980 1986 1992 1998 2004
US
bn
Emerging MarketAsiaEuropeLatin AmericaAfrica and Middle East
Emerging Markets: Net Private Capital Flows
0
10
20
30
40
50
60
70
1990-Q1
1993-Q1
1996-Q1
1999-Q1
2002-Q1
2005-Q1
US
bn
Bonds EquitiesLoans
Source: IMF
Emerging Markets Gross Issuance
CharacterisedCharacterised by a situation by a situation whereby industrial whereby industrial economies have economies have liberalisedliberalisedtheir capital accountstheir capital accounts
Developing countries, for Developing countries, for various reasons, were not various reasons, were not quite ready to fully quite ready to fully liberaliseliberalisecapital accountscapital accounts
Smaller emerging Smaller emerging economies in Asia economies in Asia nonetheless have to nonetheless have to manage this increased manage this increased volatility of capital flows, volatility of capital flows, which largely originate from which largely originate from the the industrialisedindustrialised countriescountries
The Post Bretton Woods Period – Increased magnitude and volatility of capital flows (2)
0.560.56
0.850.85
0.740.74
0.480.48
20012001--
20052005
1.691.69--1.271.27--1.121.127.047.04EuropeEurope
0.430.431.611.610.670.671.971.97Western Western HemisphereHemisphere
1.241.240.600.600.670.671.651.65AsiaAsia
0.460.461.041.040.290.291.711.71Total net Total net private capital private capital flowsflows
19911991--
20002000
19801980--
19901990
19701970--
19791979
18801880--
19131913
Coefficient of Variation of Net Private Capital Flows to Emerging Markets
Source: Bloomfield (1968); and International Monetary Fund, World Economic Outlook.
4
Asian Crisis demonstrated the dangers of volatile capital flows and premature
capital account liberalisation
5.3 -1.4 8.3 8.7 7.7 Singapore
4.9 -10.5 -1.4 8.1 7.6 Thailand
4.5 -0.6 5.2 2.8 2.1 Philippines
5.4 -7.4 7.3 9.6 6.2 Malaysia
4.3 -13.1 4.7 7.4 5.9 Indonesia
3.9 4.5 6.6 7.0 7.9 Taiwan
5.8 -6.9 4.7 7.7 7.8 Korea
5.1 -5.5 5.1 5.4 7.2 Hong Kong
99 - 05 98 97 91 - 96 80 - 90
Source: IMF WEO April 2006, Fame
Average Annual Real GDP Growth
1. Strengthening of Financial systems
Asia’s response to an environment of more volatile capital flows
-20
-15
-10
-5
0
5
10
15
20
25
Malays
ia
Indonesia
Thailan
d
Korea
%
1998 Latest
•• Balance Sheet Strengthening Balance Sheet Strengthening (both corporate and banks)(both corporate and banks)
•• Strengthening of prudential Strengthening of prudential supervisionsupervision
•• Operational restructuring Operational restructuring --improved risk management, improved risk management, stronger corporate governancestronger corporate governance
•• Injection of foreign Injection of foreign management expertisemanagement expertise
•• Stronger surveillance of Stronger surveillance of financial systemfinancial system
Capital Adequacy Ratios
5
2. Restrictions in the capital account
Asia’s response to an environment of more volatile capital flows
NonNon--residents not allowed to residents not allowed to park park ringgitringgit proceeds overseas, proceeds overseas, or in offshore accounts.or in offshore accounts.
Malaysia
Limits on bahtLimits on baht--denominated denominated credit facilities by Thai financial credit facilities by Thai financial institutions to noninstitutions to non--residents residents unless there is an underlying unless there is an underlying trade or investment activitytrade or investment activity
Thailand
Restrictions on indirect lending Restrictions on indirect lending of rupiah to nonof rupiah to non--residents via residents via the swap marketthe swap marketRegulations on net open Regulations on net open position in foreign exchange of position in foreign exchange of onshore banksonshore banks
Indonesia •• During the crisis, some During the crisis, some countries imposed countries imposed restrictions on the capital restrictions on the capital accountaccount•• Malaysia, Thailand and Malaysia, Thailand and
Indonesia had measures Indonesia had measures designed to deter designed to deter speculation of their speculation of their currencies currencies
•• China and India delayed China and India delayed the the liberalisationliberalisation of their of their financial/capital accountfinancial/capital account
050
100150200250300350400450
1982 1987 1992 1997 2002
US
bn
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Gross capital flows (LHS)Capital Controls (RHS)
Notwithstanding restrictions, the Notwithstanding restrictions, the trend is towards increasing capital trend is towards increasing capital account liberalization account liberalization
Increasing financial integration will Increasing financial integration will also mean greater capital mobility, also mean greater capital mobility, at least within the regionat least within the region
Countries more willing to open up Countries more willing to open up their capital accounts as banking their capital accounts as banking systems are strengthenedsystems are strengthened
Some evidence that capital controls Some evidence that capital controls act as deterrents to FDIact as deterrents to FDI
Indeed, recent steps taken to Indeed, recent steps taken to liberaliseliberalise capital accounts in China capital accounts in China and Indiaand India
Source: International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions; and World Economic Outlook.
Capital Controls and Flows to Capital Controls and Flows to Emerging MarketsEmerging Markets
2. Restrictions in the capital account
Asia’s response to an environment of more volatile capital flows
6
3. FX intervention and reserve accumulation
Asia’s response to an environment of more volatile capital flows
•• Most Asian central banks have Most Asian central banks have intermediate exchange rate intermediate exchange rate regimes. regimes.
•• Excessive FX volatility harmful Excessive FX volatility harmful for exporters due to risk of for exporters due to risk of misalignment and high degree of misalignment and high degree of uncertainty uncertainty
•• Asian central banks therefore Asian central banks therefore intervene to smooth out intervene to smooth out excessive FX volatility,excessive FX volatility,
•• Purchase of self insurance Purchase of self insurance against future capital flow against future capital flow reversalsreversals
0
200
400
600
800
1000
1200
1400
1600
1800
2000
89 91 93 95 97 99 01 03 05
USD
bn
China + Asean 4 + NIE 3reserves (LHS)
East Asia’s Reserves
•• Ultimately, a sound Ultimately, a sound macroeconomic framework is macroeconomic framework is the best the best defencedefence against crisis against crisis
•• Some countries have switched Some countries have switched to inflation targeting (IT), using to inflation targeting (IT), using interest rates as the operating interest rates as the operating target.target.
•• IT commits CBs towards IT commits CBs towards explicit medium term inflation explicit medium term inflation targets and implies greater targets and implies greater transparency and transparency and accountabilityaccountability
•• Over time, successful IT will Over time, successful IT will anchor price stability and lead anchor price stability and lead to more flexible exchange rate to more flexible exchange rate
YY5.5 (+/5.5 (+/-- 1)1)2005Q32005Q3IndonesiaIndonesia
YY55--662002Q12002Q1PhilippinesPhilippines
YY2.52.5--3.53.52001Q12001Q1KoreaKorea
YY00--3.53.52000Q22000Q2ThailandThailand
Publishes Forecast
Current Inflation Target
(percent)
IT Adoption
Date
Inflation Targeting Frameworks in Asia
4. Improving credibility of macroeconomic policies
Asia’s response to an environment of more volatile capital flows
7
Greater exchange rate flexibility in Asia likely going forward(1)
+++=-++=+
0.570.570.060.060.000.000.940.94Malaysian ringgit1.631.631.701.702.032.030.920.92Korean won 2.042.041.931.935.945.940.420.42Indonesian rupiah0.050.050.150.150.020.020.050.05Hong Kong dollar 0.430.430.120.120.010.010.250.25Chinese rmb
1.321.321.461.461.671.670.460.46Thai baht1.771.77
1.131.13
1.191.19
2005/2006
1.121.12
1.171.17
1.781.78
Post-crisis 2003/2005Pre-crisis
1.021.02
0.760.76
1.211.21
0.920.92Singapore dollar 1.021.02Philippines peso
0.980.98New Taiwan dollar
Standard Deviation of Monthly Percentage Fluctuations against tStandard Deviation of Monthly Percentage Fluctuations against the Dollarhe Dollar
Pre crisis (Feb 94 - May 97), Post-crisis (Jan 99 - Dec 02), 2003/2005 (Jan 03 - Jul 05), 2005/2006 (Aug 05 - May 06)
++=+-++++
0.80.81.01.01.01.01.31.3Malaysian ringgit1.31.31.51.51.81.80.90.9Korean won 2.42.41.71.75.75.71.11.1Indonesian rupiah0.80.80.60.60.60.60.60.6Hong Kong dollar 1.31.31.21.21.11.11.11.1Chinese rmb
1.21.20.90.91.51.50.70.7Thai baht1.31.3
0.60.6
1.91.9
2005/2006
1.01.0
0.90.9
1.81.8
Post-crisis 2003-2005Pre-crisis
0.90.9
0.60.6
1.61.6
0.60.6Singapore dollar 1.31.3Philippines peso
0.90.9New Taiwan dollar
Standard Deviation of Monthly Percentage Fluctuations of NEERStandard Deviation of Monthly Percentage Fluctuations of NEER
Pre crisis (Feb 94 - May 97), Post-crisis (Jan 99 - Dec 02), 2003/2005 (Jan 03 - Jul 05), 2005/2006 (Aug 05 - May 06)
Greater exchange rate flexibility in Asia likely going forward (2)
8
Exchange rates have in fact appreciated
85
90
95
100
105
110
115
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06
Jan
05 =
100
Indonesia Malaysia Philippines
Thailand Singapore
95
100
105
110
115
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06
Jan
05 =
100
China Hong Kong Korea Taiwan
Real Basis
90
95
100
105
110
115
120
125
130
135
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06
Jan
05 =
100
Indonesia Malaysia Philippines
Thailand Singapore
90
95
100
105
110
115
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06
Jan
05 =
100
China Hong Kong Korea Taiwan
Nominal BasisTrade Weighted exchange rates
0
10
20
30
40
50
Hong Kong
Korea
Taiwan
Indonesia
Malays
ia
Philippines
Thailand
Singapore US
EU*
Japan**
% o
f G
DP
Exports as a share of GDP (2005)
Problems posed by volatile capital flows are more acute for Asia because of high export
dependence
0
100
200
300
Hong K
ongKore
a
Taiwan
Indonesia
Malays
ia
Philippin
es
Thailan
d
Singap
ore US EUJa
pan
% o
f G
DP
Average for Asia excluding Japan: 26%
Average for Asia excluding Japan: 103%
Manufacturing as a share of GDP (2005)
•Manufacturing, Energy and Mining ** Data for 2003
9
Greater emphasis on domestic demand than is commonly assumed (1)
ASEAN 4
-20-15-10-505
1015
84 87 90 93 96 99 02 05% P
t Con
trib
utio
n to
GD
P G
row
th Pte Consumption Govt ConsumptionGFCF Change in StocksNet Exports Total Domestic Demand
-20-15-10-505
101520
84 87 90 93 96 99 02 05% P
t Con
trib
utio
n to
GD
P G
row
th
Pte Consumption Govt ConsumptionGFCF ExportsImports Change in StocksTotal Domestic Demand
NIE- 3
-15
-10
-5
0
5
10
15
84 87 90 93 96 99 02 05% P
t Con
trib
utio
n to
GD
P G
row
th Pte Consumption Govt ConsumptionGFCF Change in StocksNet Exports Total Domestic Demand
-15-10
-505
101520
84 87 90 93 96 99 02 05% P
t Con
trib
utio
n to
GD
P G
row
th
Pte Consumption Govt ConsumptionGFCF ExportsImports Change in StocksTotal Domestic Demand
Contribution to GDP growth
-10
-5
0
5
10
15
20
25
84 87 90 93 96 99 02
% P
t Con
trib
utio
n to
GD
P G
row
th
Net ExportsChange in StocksGFCFGovt ConsumptionPte ConsumptionTotal Domestic Demand
-10
-5
0
5
10
15
20
25
84 87 90 93 96 99 02
% P
t Con
trib
utio
n to
GD
P G
row
th
Change in StocksImportsExportsGFCFGovt ConsumptionPte ConsumptionTotal Domestic Demand
China
Greater emphasis on domestic demand than is commonly assumed(2)
Contribution to GDP growth
10
Policy issues
TrilemmaTrilemma constraint constraint –– how binding?how binding?Trend towards greater openness in capital Trend towards greater openness in capital accounts accounts –– how open? What is the benefit how open? What is the benefit of full convertibility?of full convertibility?Flexibility of exchange rate Flexibility of exchange rate –– how flexible? how flexible? What is the gain from floating? What is the gain from floating? Intervention/sterilization/foreign reserves Intervention/sterilization/foreign reserves ––what are the costs and benefits?what are the costs and benefits?International organizations/cooperation International organizations/cooperation ––what role?what role?
Thank You
11
Summary
Post Post BrettonBretton Woods Woods –– globalizedglobalized financial markets financial markets with large and volatile capital flowswith large and volatile capital flowsTrilemmaTrilemma condition binding condition binding –– no escaping no escaping Asian economies have implemented reformsAsian economies have implemented reforms
•• Strengthened balance sheets of banks and Strengthened balance sheets of banks and corporatecorporate
•• Strengthened financial system and enhanced Strengthened financial system and enhanced financial surveillancefinancial surveillance
•• FX Intervention and reserves accumulation FX Intervention and reserves accumulation •• Sound and credible macroeconomic frameworkSound and credible macroeconomic framework•• Allowed more flexibility in their exchange ratesAllowed more flexibility in their exchange rates
Policy challenges
Policymakers will have to be more aware of challenges Policymakers will have to be more aware of challenges associated with an environment of open capital accounts associated with an environment of open capital accounts and more volatile flowsand more volatile flows
For instance, despite the credibility of New ZealandFor instance, despite the credibility of New Zealand’’s s monetary policies, it too has experienced recent exchange monetary policies, it too has experienced recent exchange rate volatilityrate volatility
NEER drop of 10% in the 1st 3 months of 2006.NEER drop of 10% in the 1st 3 months of 2006.By fluctuating in a very wide range (rising more than 50% By fluctuating in a very wide range (rising more than 50% from 2000from 2000--2005), it has caused income volatility for 2005), it has caused income volatility for exporters and importexporters and import--competing firms.competing firms.In the current phase of the cycle, both domestic and In the current phase of the cycle, both domestic and imported inflation are likely to be strong, delaying the imported inflation are likely to be strong, delaying the point at which interest rates can respond to the slowing point at which interest rates can respond to the slowing economyeconomyRBNZ announced in 2004 willingness to intervene in FX RBNZ announced in 2004 willingness to intervene in FX market, although under tightly constrained circumstancesmarket, although under tightly constrained circumstances
12
0
20
40
60
80
100
120
97 99 01 03 05
Jan
97 =
100
Indonesia MalaysiaPhilippines SingaporeThailand
40
50
60
70
80
90
100
110
97 99 01 03 05
Jan
97 =
100
China Hong KongKorea Taiwan
Bilateral Exchange rates against the US$
The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies and Capital Mobility (Obstfeld, Shambaugh & Taylor, 2005)
•• Analyses the validity of the Analyses the validity of the TrilemmaTrilemma worldwide, across 3 historical worldwide, across 3 historical periods over 130 yearsperiods over 130 years–– The Classical Gold Standard (1870The Classical Gold Standard (1870--1913)1913)–– The The BrettonBretton Woods System (1959Woods System (1959--1973)1973)–– The PostThe Post--BrettonBretton Woods era (1974Woods era (1974--present)present)
The Trilemma has been validated in history
∆Rit = α + β∆Rbit + θ(c + Rit-1 – γRbit-1) + uit
Local Interest Rate Base Interest Rate
• β expresses the relationship between the local and base interest rates. β < 1 if governmentsuse their monetary independence to offset base interest rate shocks.
•R2 is the proportion of the variation in base rates explained by the regression model.
••Compares the movements of local and base interest rates, Compares the movements of local and base interest rates, using the equationusing the equation
13
Low (Low (ββ = .46, R= .46, R2 2 = .19)= .19)
Low (Low (ββ = .52, R= .52, R2 2 = .41)= .41)
FixedFixed
FixedFixed
Moderate (Moderate (ββ = .27, R= .27, R2 2 = .01)= .01)Generally LaxGenerally LaxFloatingFloatingPostPost--BrettonBrettonWoodsWoods
High (High (ββ = = --.26, R.26, R2 2 = .04)= .04)StrictStrictFixedFixedBrettonBretton--WoodsWoods
High (High (ββ = .05, R= .05, R2 2 = .00)= .00)LaxLaxFloatingFloatingGold StandardGold Standard
MonetaryMonetaryAutonomyAutonomy
Capital ControlsCapital ControlsForexForexRegimeRegime
•Lower β or lower R2 implies more monetary independence.
The analysis validates the Trilemma as a guiding policy framework, as its lessons have been borne out over a long span
of economic history
∆Rit = α + β∆Rbit + θ(c + Rit-1 – γRbit-1) + uit
• β expresses the relationship between the local and base interest rates. β < 1 if governmentsuse their monetary independence to offset base interest rate shocks.
•R2 is the proportion of the variation in base rates explained by the regression model.
Local Interest Rate Base Interest Rate
The Trilemma has been validated in history
