THE 5th ANNUAL CUSCO CONFERENCE ORGANIZED BY THE CENTRAL RESERVE BANK OF PERU AND THE REINVENTING BRETTON WOODS COMMITTEE SESSION DISCUSSION POINTS

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1 THE 5th ANNUAL CUSCO CONFERENCE ORGANIZED BY THE CENTRAL RESERVE BANK OF PERU AND THE REINVENTING BRETTON WOODS COMMITTEE SESSION DISCUSSION POINTS 70 YEARS AFTER BRETTON WOODS: MANAGING THE INTERCONNECTEDNESS OF THE WORLD ECONOMY Cusco, Peru, July 21-22, 2014 Venue: Hotel Libertador FORMAT OF THE CONFERENCE An intimate group of participants are expected at a two- day seminar. Each speaker will present a paper/speech for about 15 minutes. At the end of each session the moderator will open the floor for questions lasting up to 15 minutes. All speakers are kindly requested to send their papers and PowerPoint presentations one week before the conference by to Julia Vivanco at julia.vivanco@bcrp.gob.pe. We intend to publish the proceedings of the conference. We are providing here a guidance note for the different sessions. SESSION I MANAGING THE INTERCONNECTED OF THE GLOBAL ECONOMY The international monetary system has changed considerably since Bretton Woods- and in ways that were largely unforeseen. Instead of a system of fixed exchange rates among major currencies, we now have a floating rate system. Where capital controls were once pervasive, we now have global financial markets of unimaginable size and complexity. From the relatively small group of 35 countries that became the founding members of the IMF, Fund membership has expanded to include virtually every economy in the world. Today, the global economy has become increasingly inter- connected. Exports and imports of goods and services represent on average 55 percent of GDP

2 of OECD countries ranging from 29 percent of GDP for the U.S. to 157 percent for the Netherlands. Openness implies that domestic private sector and public sector imbalances exert a greater impact on the external economy. This should strengthen the case for greater policy coordination. At the same time, the traditional channels for policy coordination, e.g. the exchange rate, have diminished in importance. New channels for coordination like financial regulation remain doubtful in their effectiveness. The decline or ineffectiveness of traditional coordination channels seems to represent one of the greatest challenges for the global economy. What are the dominant factors for interconnectedness? The economic and financial crisis caused some reversal of international integration, has the global economy reached its integration peak? The Eurozone has demonstrated the challenges of policy coordination, what level of coordination can the rest of the global economy reasonably expect? Persistent high exchange rate volatility suggests that monetary and exchange rate policy coordination has broken down, how can it be fixed and should it? SESSION II A GLOBAL FRAMEWORK FOR VOLATILE CAPITAL FLOWS The stock of international portfolio investments has increased from 34 percent of global GDP in 2001 to 63 percent in 2007 and fell subsequently to 51 percent in The rapid expansion of portfolio investments may not have allowed building sufficient safeguards. International portfolio flows have remained highly concentrated with emerging markets representing only 3 percent of total international portfolio investors in 2012 (IMF CPIS). It is well recognised that the volatility of capital flows poses a threat to international stability. At the same time, capital flows should play a useful role to support domestic investments. What role have international capital flows played for economic development? What are the difficulties of dealing with volatile capital flows? Should deepening of emerging markets capital markets allow for better management and integration of emerging markets capital flows? SESSION III REDUCING GLOBAL FINANCIAL INSTABILITY: CAN AND SHOULD WE COORDINATE GLOBAL MACROPRUDENTIAL POLICIES The development of a macro- prudential framework remains work in progress amid evolving concepts of what macro- prudential policies are and what their boundaries should be. The main aim of macro- prudential policy is to limit the build- up of system- wide financial risk through imposing limits on financial transactions and containing risk concentration. The coordination of macro- prudential policies has made significant progress through common standards as set e.g. by the FSB and Basle Committee. At the same time domestic preferences have led to deviations from common standards, e.g. for the U.S., Switzerland and the United Kingdom. Differential standards may offer undue loopholes and unwanted regulatory arbitrage opportunities. However, domestic circumstances and market practice, e.g. covered bonds, may justify operating exemption regimes.

3 Are common standards for financial regulation feasible and desirable? Are macro- prudential rules credible substitutes for global policy coordination? Past experience of lagged implementation of older Basle rules suggests that comprehensive implementation remains elusive. Does it matter? Has the identification of systemically important institutions made a difference and can it? The regulatory burden has increased in part due to attempts of setting global standards. Has this unduly raised barriers of entry and reduced competition in the financial sector? SESSION IV EXCHANGE RATE ARRANGEMENTS IN THE 21 ST CENTURY: IS THE BIPOLAR VIEW STILL CORRECT The range of exchange rate arrangements has remained wide. The IMF distinguishes eleven different de facto exchange rate arrangements (IMF 2012 Annual report on exchange arrangements and exchange restrictions). Out of 190 countries covered, at opposing ends and excluding countries with no separate legal tender and including the Eurozone member countries as free floating, 12 are identified as currency boards and 31 as free floating. During the 1990s and 2000s there was increasing conviction that countries should not occupy the middle ground and adopt either a fixed or floating regimes to ward off speculative exchange rate attacks. How important are exchange rate classifications? Asymmetry in intervention practices implies that central banks maintain considerable discretion in intervention, is this desirable? Is seeming lack of economic policy coordination an outcome of different exchange rate regimes? Is fear of floating still valid? Countries seem to display considerable fear of intervening amid scarce use of foreign exchange reserves to support exchange rates, does this not undermine the usefulness of reserves? SESSION V MANAGING THE TRANSITION OF THE INTERNATIONAL MONETARY SYSTEM: POLICY COORDINATION IN A MULTIPOLAR WORLD The international economy has become increasingly diversified. Emerging markets represent more than 45 percent of global GDP (at market prices) in 2013 and have maintained significantly higher growth rates than advanced economies since the early 2000 suggesting that policy needs and stances should differ. Traditional pace setters of the global economy have already seen their influence wane. At the same time, a rise in inter- country policy discretion means that traditional implicit or explicit coordination channels, e.g. the exchange rate, seem in decline. Meanwhile, mounting exchange rate volatility appears indicative of a lack of policy coordination and economic divergence.

4 What are the risks of an increasingly diversified global economy? What is the case for greater policy coordination? What would be the key elements to foster greater policy coordination? International monetary arrangements have been mostly rules- based, is there scope for a more incentives- based framework? How the international monetary system might operate in the next decade? SESSION VI THE PROVISION OF INTERNATIONAL LIQUIDITY: UNCONVENTIONAL MONETARY POLICY, UNCONVENTIONAL POLICY RESPONSES? The crisis is a powerful reminder that liquidity both domestic and international - can never be taken for granted. How will it be provided in the future, and by whom? International liquidity has remained highly dependent on dollar liquidity. Countries have tried to build self- insurance through reserve accumulation, expand Regional Financing Arrangements (RFAs) and the network of bilateral swap lines, while the Fund has revamped its lending instruments. As the world becomes increasingly divergent and diversified relying on a single or dominant source of international liquidity may be too risky. The adoption by the Federal Reserve of central bank swap lines as permanent facilities with a small number of central banks risk creating further international liquidity fragmentation. The unconventional monetary policy stance of the Federal Reserve may bear new risks. Is there a case for seeking to broaden the sources of international liquidity? What are the key ingredients for a transition from the current regime? Are market forces sufficient? Does the engineered decline of sterling during the 1960s offer a model for greater international currency diversification? Has the policy discussion unduly focused on the remedy (e.g. more IMF resources) rather than the illness (lack of emerging markets capacity to issue international liquidity)? SESSION VII LOSING THE CENTRICITY? THE RISE OF EMERGING POWERS AND THE SUSTAINABILITY OF THE GOVERNANCE STRUCTURE OF THE IFIS. The IMF 2010 governance reform remains pending for U.S. approval. This has met with protest by some. At the same time, the proposed changes, while important in signalling change, are unlikely to have a material impact on the operations of the IMF. With the share of voting power of the advanced economies declining from 57.9 percent (post- second round) to 55.3 percent, few further changes in the distribution of voting power can be expected. What is key for the successful governance of the IFIs? Is voting power that important? Are the Bretton Woods institutions, given considerable institutional inertia, sufficiently reformable to adapt to today s circumstances credibly?

5 Are we witnessing an alternative to the current framework with the creation of BRIC development Bank. Swap network among emerging markets, Asian Infrastructure Bank? SESSION VIII WHAT KIND OF INTERNATIONAL FINANCIAL ARCHITECTURE OF THE NEXT DECADE? In this last panel, we will ask our speakers to reflect on these two scenarios for the international financial architecture for the next decade Over the last two decades, the international financial architecture has been ineffective in preventing major financial crises. While there have been significant changes notably in financial regulation and to some extent in terms of financial safety nets, the architecture may be fundamentally flawed. Looking at the next decade, one can project two alternative - and polar - scenarios for the evolution of the international financial system. First, a scenario of progressive and partial fragmentation, de- globalisation. No significant capital account opening would occur in many parts of the world. On the contrary, new barriers could be erected either in the form of capital controls or through national regulations. Foreign exchange reserves would keep growing, both in absolute and in percentage of world GDP. This scenario may be seen as the only realistic response to increased diversity in a multipolar world. An opposite scenario would see the progressive opening of all capital accounts, together with some (more or less intensive) convergence in financial systems and regulations. This would allow for the emergence of a unified world capital market, an efficient allocation of savings across countries and a smooth financing of current account imbalances. The move towards a financially open world would, at the very least, have to be supported by robust arrangements on international liquidity provision.