Panel Discussion: Coordinated Policies for Global Liquidity and Robust Growth Remarks to The Bank of Korea International Conference 2013 4 June 2013 Seoul, Korea Timothy Lane Deputy Governor Bank of Canada
Basic questions Where is there a need for coordination? To what extent do decentralized policies yield the right outcome? To the extent that coordination may be needed, are existing means of coordination adequate? 2
Central bank policies have helped counter private deleveraging The collapse of private liquidity through crisis and the subsequent deleveraging process in post-crisis economies exerted powerful contractionary forces on the global economy. Central banks in major jurisdictions including U.S., E.U., Japan, U.K. cut policy rates to historic lows and have expanded their balance sheets. 3
Policy interest rates were cut to historic lows Policy interest rates, daily data % 7 6 5 4 3 2 1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0 Canada United States Euro area Japan Note: On 5 October 2010, the Bank of Japan changed the target for its policy rate from 0.1 per cent to a range of 0.0 to 0.1 per cent. The U.S. Federal Reserve has been maintaining a target range for its policy rate of 0.0 to 0.25 per cent since 16 December 2008. Sources: Bank of Canada, U.S. Federal Reserve, European Central Bank and Bank of Japan Last observation: 29 May 2013 4
Major central banks have committed to providing substantial unconventional stimulus Change in central bank assets relative to GDP since 2007Q2 Percentage points 40 35 30 25 20 15 10 5 U.S. Federal Reserve European Central Bank Bank of England Bank of Japan 0 Change in assets relative to GDP between 2007Q2 and 2013Q1 Expected change in assets relative to GDP between 2013Q2 and 2015Q4 Note: Expected increase in the assets of the U.S. Federal Reserve is based on an average of private sector forecasts. For the Bank of Japan, the expected change in assets is based on the most recent policy announcement. Data for the ECB represent the change between 2007Q2 and 2012Q4. Sources: U.S. Federal Reserve, U.S. Bureau of Economic Analysis; European Central Bank, Eurostat; Bank of England, U.K. Office for National Statistics; Bank of Japan, Cabinet Office of Japan; and Bank of Canada calculations Last observations: Euro area, 2012Q4; other countries, 2013Q1 5
Effects on non-crisis countries Expansionary monetary policy to support domestic objectives in post-crisis economies can put upward pressure on other countries currencies resulting in appreciation where exchange rates are flexible. On balance, however, exceptional easing in post-crisis economies is likely to be beneficial to other countries that were not at the centre of the crisis, since the favourable effects of stronger growth in the major post-crisis economies outweigh the adverse effects of currency appreciation. 6
Currencies of non-crisis countries appreciated from their crisis lows Real broad effective exchange rate indexed to December 2008 = 100, monthly data Index 160 150 140 130 120 110 100 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 90 Canada Australia Brazil Korea Sweden Switzerland Sources: Bank for International Settlements and Bank of Canada calculations Last observation: April 2013 7
Monetary easing in non-crisis countries results in domestic imbalances In some of the non-crisis countries, monetary easing has resulted in a pattern of growth more heavily reliant on domestic demand than on exports. There are limits to this growth strategy, as imbalances have appeared in housing markets and the financial system more broadly. Household imbalances in Canada are an example. We are now seeing a constructive evolution of household debt as growth in total household credit has continued to moderate. 8
Canada s export recovery is the weakest in postwar period Comparison of real exports across economic cycles; quarter before the downturn in real GDP = 100, quarterly data Quarterly peak in real GDP before the downturn Index 180 170 Years before the downturn Years after the downturn 160 150 140 130 120 110 100 90-1 0 1 2 3 4 5 6 7 80 Current cycle Average of previous cycles (since 1951) Base-case scenario Range of previous cycles (since 1951) Sources: Statistics Canada and Bank of Canada calculations and projections 9
Canada has relied on domestic demand Evolution of real private domestic demand since pre-recession peak Index, peak of real GDP = 100, quarterly data Index 108 88 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Canada United States United Kingdom Euro area Japan Note: Private domestic demand includes consumer and business and residential investment, except for the Euro area, where it includes government investment. Sources: Statistics Canada, U.S. Bureau of Economic Analysis, Eurostat, Cabinet Office of Japan, U.K. Office for National Statistics, and Bank of Canada calculations Last observation: 2012Q4 UK and EA; 2013Q1 all others 106 104 102 100 98 96 94 92 90 10
Canadians are now more indebted than the Americans or the British Ratio of household debt to disposable income % 170 160 150 140 130 120 110 100 90 80 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 70 Canada United States United Kingdom Sources: Statistics Canada (ratio of Canadian household credit market debt to disposable income, adjusted for U.S. concepts and definitions), U.K. Office for National Statistics and U.S. Federal Reserve Last observation: 2012Q4 11
Imbalances in Canadian housing markets The share of residential investment in GDP is elevated Ratio of nominal residential investment to nominal GDP % 7.5 House prices are still high relative to income and rents House price-to-income and price-to-rent ratios 180 7.0 160 140 6.5 120 6.0 100 80 5.5 60 5.0 40 20 4.5 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 0 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 4.0 Price-to-income ratio Historical average from 1981 to present Price-to-rent ratio Note: The broken line indicates the historical average from 1975 to the present. Sources: Statistics Canada and Bank of Canada calculations Last observation: 2012Q4 Note: The historical average from 1981 to latest available is set equal to 100. Sources: Teranet-National Bank, Statistics Canada, Canadian Real Estate Association and Bank of Canada calculations. Last observation: 2012Q4 12
Countries with less-flexible exchange rates have responded differently For non-crisis countries with less-flexible exchange rates, expansionary monetary policy in post-crisis economies has added to capital inflows. If these inflows were unsterilized, they would result in higher inflation and thus real exchange rate appreciation. In practice, this has taken place only to a limited degree. To some extent, inflows have been sterilized, accompanied by various restrictions on the financial system. From a global perspective, such sterilization partly offsets the effects of the monetary expansion in post-crisis countries 13
This is part of the broader problem of external adjustment Starting from an unsustainable configuration of savingsinvestment imbalances, deleveraging is needed in deficit countries, accompanied by a rotation of demand toward domestic demand in surplus countries and supported by real exchange rate adjustment the good solution. In the wake of the crisis, market forces have driven deficit countries toward deleveraging. But the surplus countries have felt less pressure to bring about a rotation of demand. 14
The good solution: adjustment in exchange rates Real effective exchange rates in China and the United States Index: 2011Q3 = 1 Index 1.3 1.2 Data Projection 1.1 1.0 0.9 2004 2006 2008 2010 2012 2014 2016 2018 2020 0.8 China: Good Solution US: Good Solution Sources: GMUSE and BoC-GEM-Fin simulations Last observation: June 2011 15
The good solution: global imbalances resolved Current account balances % of GDP 12 Data Projection 9 6 3 0-3 -6 2004 2006 2008 2010 2012 2014 2016 2018 2020-9 United States China Japan Euro area Sources: GMUSE & BoC-GEM-Fin simulations Last observation: June 2011 16
Delayed or asymmetric adjustment In the bad scenario, adjustment is delayed and real exchange rates do not adjust. Bank of Canada estimates that $6 trillion in global output would be lost. Asymmetric adjustment is the ugly scenario: deleveraging in deficit countries, but no rotation of demand in surplus countries. Output losses may be even larger. 17
Doing half the job could be even worse... The bad and the ugly scenarios GDP relative to the good scenario Index: 2011Q3 = 1 Index 1.02 1.00 0.98 Data Projection 0.96 0.94 0.92 2010 2011 2012 2013 2014 2015 0.90 Bad solution Ugly solution Sources: GMUSE and BoC-GEM-Fin simulations Last observation: June 2011 18
Coordination in the G-20 Framework The G-20 s Framework for Strong, Sustainable and Balanced Growth (Toronto 2010 Summit) is intended to provide a focal point for appropriate policies. The G-20 have established a peer-review mechanism to track progress. The IMF s bilateral and multilateral surveillance both work toward broadly similar objectives. 19