The Trilemma: Insights and Limitations

Transcription

1 The Trilemma: Insights and Limitations Menzie D. Chinn University of Wisconsin, Madison and NBER Universität Leipzig/Universität Duisburg Essen Conference on Exchange Rates, Monetary Policy and Financial Stability October 13, 2014 Leipzig

2 Remember Currency Wars? Remember the Taper Tantrum? Thailand India Brazil S.Africa Turkey -.4 Log exchange rates against USD, 2013M05=0 Argentina -.5 M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 M1 M (1/24) 2

3 Outline 1. Progress in Measuring the Trilemma 2. The Evolution of the Trilemma, and Reserves 3. Reserve Accumulation, Again 4. Trilemma or Dilemma? 3

4 The Trilemma, aka The Impossible Trinity 4

5 Measuring the Trilemma Goals Monetary Independence corr( i i, i j ) 1 MI = 1 2 where i refers to home countries and j to the base country. Exchange Rate Stability 0.01 ERS 0.01 stdev( (log( exch _ rate)) 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. 5

6 Alternative Measures: Capital Openness Schindler Chinn-Ito Source: Quinn, Schindler, and Toyoda (2011) 6

7 Persistence (or Gates vs. Walls) 7

8 Indices for Industrial Countries 8

9 Indices for Emerging Markets 9

10 Indices for Less Developed Countries 10

11 Indices for Emerging Asia 11

12 Indices for Developing Asia 12

13 Indices for Latin America 13

14 Indices for Less Developed Countries ex.-asia 14

15 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 Emerging Asian Economies Monetary Independence Financial Integration Exchange Rate Stability (Up to 2007) International Reserves/GDP Note: This sample includes Taiwan, HK, Indonesia, Korea, Malaysia, Philipines, Singapore, Thailand, China 16

17 Emerging Asian Economies: Emerging Asian Economies Monetary Independence Financial Integration Exchange Rate Stability (Up to 2007) International Reserves/GDP Note: This sample includes Taiwan, HK, Indonesia, Korea, Malaysia, Philipines, Singapore, Thailand, China 17

18 Emerging Asian Economies: Emerging Asian Economies Monetary Independence Financial Integration Exchange Rate Stability (Up to 2007) International Reserves/GDP Note: This sample includes Taiwan, HK, Indonesia, Korea, Malaysia, Philipines, Singapore, Thailand, China 18

19 Emerging Asian Economies: Emerging Asian Economies Monetary Independence Financial Integration Exchange Rate Stability (Up to 2007) International Reserves/GDP Note: This sample includes Taiwan, HK, Indonesia, Korea, Malaysia, Philipines, Singapore, Thailand, China 19

20 Emerging Asian Economies: Emerging Asian Economies Monetary Independence Financial Integration Exchange Rate Stability (Up to 2007) International Reserves/GDP Note: This sample includes Taiwan, HK, Indonesia, Korea, Malaysia, Philipines, Singapore, Thailand, China 20

21 Emerging Asia ex.-china, and China Emerging Asian Economies and China Monetary Independence Financial Integration Exchange Rate Stability EMG Asia: EMG Asia: EMG Asia: China: China: China: International Reserves/GDP Note: The Emerging Asian Economies sample includes Indonesia, Korea, Malaysia, Philipines, and Thailand 21

22 Emerging Latin America Emerging Latin America Monetary Independence Financial Integration (Up to 2007) Center is at International Reserves/GDP Exchange Rate Stability includes Argentina, Brazil, Chile, Colombia, Ecuador, Jamaica, Mexico, Peru, Trinidad and Tobago, and Venezuela. 22

23 Emerging LatAm: Emerging Latin America Monetary Independence Financial Integration (Up to 2007) Center is at International Reserves/GDP Exchange Rate Stability

24 Emerging LatAm: Emerging Latin America Monetary Independence Financial Integration (Up to 2007) Center is at International Reserves/GDP Exchange Rate Stability

25 Emerging LatAm: Emerging Latin America Monetary Independence Financial Integration (Up to 2007) Center is at International Reserves/GDP Exchange Rate Stability

26 Emerging LatAm: Emerging Latin America Monetary Independence Financial Integration (Up to 2007) Center is at International Reserves/GDP Exchange Rate Stability Emerging Latin America include Argentina, Brazil, Chile, Colombia, Ecuador, Jamaica, Mexico, Peru, Trinidad and Tobago, and Venezuela. 26

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 27

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 the emergence of rapid globalization (1990) and the rise of China (2001) Countries do alter policy configurations when they experience major shocks 28

29 Reserves, Again 29

30 Differing Paths Source: Bussiere, Chen, Chinn and Lisack (2014) 30

31 Insurance against GDP Loss Source: Bussiere, Chen, Chinn and Lisack (2014) 31

32 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

33 A Global Financial Cycle? Rey,

34 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

35 But Pegs Do Matter: Response to Base Country Interest Rate Klein and Shambaugh

36 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

37 2-step Process (a la Forbes- Chinn 2003): Step 1 estimate γ s R F : a return in local country Z G : global factors - Policy rates, oil, commodity, gold - VIX, Ted X c : corresponding return Y : local factor (y/y IP growth) 37

38 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 countries 38

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47 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

48 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