Capital Flows and Monetary Coordination Rakesh Mohan Executive Director International Monetary Fund June 9, 214
Capital Flows: Historical Overview Pre-WW I Debt flows, mostly long-term Gold standard stable exchange rates Financial openness comparable to modern era WW I WW II Breakdown of IMS WW II 1971 (Bretton Woods) Mostly fixed exchange rates Trade liberalization Capital accounts mostly closed/controlled, incl. advanced economies 1971 onwards (especially 198s onwards) Floating exchange rates Opening of capital accounts Oil prices hikes petro dollars recycling Large capital flows to EDEs both push and pull factors June 9, 214 Rakesh Mohan / IMF 2
Incidence of Crises (Number of crises per year) Period Banking Crisis Currency Crisis External Default Gold Standard (187-1913) 1.3.6.9 Interwar Period (1925-1939) 2.1 1.7 1.5 Bretton Woods (1948-1972).1 1.7.7 a) 1948-1958. 1.4.3 b) 1959-1972.1 1.9 1.1 Post-Bretton Woods (1973-21) 2.6 3.7 1.3 a) 1973-1989 2.2 5.4 1.8 b) 199-21 3. 2.4.8 Source: Bush, Farrant and Wright (211) [Table A, p,7]. Increased frequency of financial crises in the post-bw system of open capital accounts June 9, 214 Rakesh Mohan / IMF 3
198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 US $ billion Percent to GDP Capital Flows to EDEs (1) Net Private Flows 8 5 6 4 4 2 3 2 1-2 -1-4 -2-6 -3 Direct investment, net Other private financial flows, net Private portfolio flows, net Total private financial flows, net Direct investment, net Other private financial flows, net Private portfolio flows, net Total private financial flows, net Continued volatility in capital flows to EMDEs Source: IMF June 9, 214 Rakesh Mohan / IMF 4
198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 US $ billion Percent to total EDEs 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 Capital Flows to EDEs (2) Net Private Flows region-wise 8 2 7 6 15 5 1 4 3 5 2 1-5 -1-1 -2-3 -15 CIS Asia Europe LAC -2 MENA SSA All EDEs CIS Asia Europe LAC MENA SSA Large capital flows to LAC (early 198s), Asia (mid-198s to mid-199s); and Europe (2s) associated with subsequent crisis episodes. Source: IMF CIS: Commonwealth of Independent States; LAC = Latin America and the Caribbean; MENA = Middle East, North Africa, Afghanistan, and Pakistan ; SSA = Sub-Saharan Africa June 9, 214 Rakesh Mohan / IMF 5
23 5 26 27 28 29 21 211 212 213 26 27 28 29 21 211 212 213 US$ billion Percent to GDP Capital Flows to EDEs (3) Inflows (from non-residents) and Outflows (by residents) 18 16 14 12 1 8 6 4 2 12 1 8 6 4 2 Private Financial Flows, Net Inflows (net) by non-residents Outflows (net) by residents Private Financial Flows, Net Inflows (net) by non-residents Outflows (net) by residents Underlying capital inflows and capital outflows are multiples of net flows, and also more volatile. Source: IMF. June 9, 214 Rakesh Mohan / IMF 6
Jan-24 Sep-24 May-25 Jan-26 Sep-26 May-27 Jan-28 Sep-28 May-29 Jan-21 Sep-21 May-211 Jan-212 Sep-212 May-213 Jan-214 Jan-24 Sep-24 May-25 Jan-26 Sep-26 May-27 Jan-28 Sep-28 May-29 Jan-21 Sep-21 May-211 Jan-212 Sep-212 May-213 Jan-214 US$ billion US$ billion Capital Flows to EDEs (4) Institutional and Individual Investor Flows and Fund Manager Allocations EPFR Flows: Monthly 3 25 2 15 1 EPFR Flows: Cumulative (since Jan 24) 35 3 25 2 5 15-5 1-1 5-15 -2-25 Equity Bond Bond flows more volatile than equity flows Equity Bond Source: EPFR, Haver Analytics. June 9, 214 Rakesh Mohan / IMF 7
1987 1989 1991 1993 1995 1997 1999 21 23 25 27 29 211 213 1987 1989 1991 1993 1995 1997 1999 21 23 25 27 29 211 213 US$ billion Percent to GDP Capital Flows to EDEs (5) Net International Debt Issuances by EDEs 25 2. 1.8 2 15 1.6 1.4 1.2 1 5 1..8.6.4.2. -5 Sharp jump in debt issuances by EDEs since 29: impact of highly accommodative MP in AEs? (Source: BIS) June 9, 214 Rakesh Mohan / IMF 8 -.2
1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 US$ billion US$ billion Capital Flows to EDEs (6) EDEs v/s AEs (US $ billion) Gross Inflows 12, 1, 8, Net Inflows 7 6 5 4 6, 4, 3 2 2, 1-1 Inflows - EDEs Inflows - AEs -2 Net - EDEs Net - AEs Capital inflows and outflows in AEs are multiples of EDE flows, although net flows are comparable. AEs equally vulnerable to volatile capital flows. Source: IMF. June 9, 214 Rakesh Mohan / IMF 9
1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 Percent to GDP Percent to GDP Capital Flows to EDEs (7) EDEs v/s AEs (% to GDP) Gross Inflows 3 Net Inflows 5 25 4 2 3 15 2 1 1 5-1 Inflows - EDEs Inflows - AEs Net - EDEs Net - AEs June 9, 214 Rakesh Mohan / IMF 1
Jan-2 Dec-2 Nov-21 Oct-22 Sep-23 Aug-24 Jul-25 Jun-26 May-27 Apr-28 Mar-29 Feb-21 Jan-211 Dec-211 Nov-212 Oct-213 Percent Percent Monetary Policy: AEs (1) Policy Rates 7. 6. 5. 4. 3. 2. 1.. Long-term (1-year) bond yields 16 14 12 1 8 6 4 2 Euro area UK US Germany Japan UK US Monetary policy cycle in AEs a key source of capital flows (push factor) and the volatility; pull factors (domestic EDE factors) also important. Source: IMF, OECD June 9, 214 Rakesh Mohan / IMF 11
Increase between 27 and 213 (%) Percent to GDP Monetary Policy: AEs (2) Central Bank Balance Sheets 4 9 35 3 25 8 7 6 5 2 4 15 3 1 2 1 5 Euro Area Bank of Japan Bank of England US Federal Reserve Swiss National Bank Euro Area Bank of Japan Bank of England 27 212 213 US Federal Reserve Swiss National Bank June 9, 214 Rakesh Mohan / IMF 12
Jan-2 Oct-2 Jul-21 Apr-22 Jan-23 Oct-23 Jul-24 Apr-25 Jan-26 Oct-26 Jul-27 Apr-28 Jan-29 Oct-29 Jul-21 Apr-211 Jan-212 Oct-212 Jul-213 Apr-214 Jan-2 Oct-2 Jul-21 Apr-22 Jan-23 Oct-23 Jul-24 Apr-25 Jan-26 Oct-26 Jul-27 Apr-28 Jan-29 Oct-29 Jul-21 Apr-211 Jan-212 Oct-212 Jul-213 Apr-214 Jan-2 Sep-2 May-21 Jan-22 Sep-22 May-23 Jan-24 Sep-24 May-25 Jan-26 Sep-26 May-27 Jan-28 Sep-28 May-29 Jan-21 Sep-21 May-211 Jan-212 Sep-212 May-213 Jan-214 Jan-2 Oct-2 Jul-21 Apr-22 Jan-23 Oct-23 Jul-24 Apr-25 Jan-26 Oct-26 Jul-27 Apr-28 Jan-29 Oct-29 Jul-21 Apr-211 Jan-212 Oct-212 Jul-213 Apr-214 Jan-2 Sep-2 May-21 Jan-22 Sep-22 May-23 Jan-24 Sep-24 May-25 Jan-26 Sep-26 May-27 Jan-28 Sep-28 May-29 Jan-21 Sep-21 May-211 Jan-212 Sep-212 May-213 Jan-214 Jan-2 Oct-2 Jul-21 Apr-22 Jan-23 Oct-23 Jul-24 Apr-25 Jan-26 Oct-26 Jul-27 Apr-28 Jan-29 Oct-29 Jul-21 Apr-211 Jan-212 Oct-212 Jul-213 Apr-214 Exchange Rates 2.1 1.9 1.7 1.5 1.3 1.1.9.7 63 58 53 48 43 38 4. 3.5 3. 2.5 2. 1.5 1. USD per Euro USD per UK Pound India (Rupees per USD) Brazil (Reais per USD) 14 13 12 11 1 9 8 7 2.5 2. 1.5 1..5. 12 11 1 9 8 7 6 5 Japanese Yen per USD Turkey (Lira per USD) South Africa (Rand per USD) Volatile capital flows lead to volatility in exchange rates adverse implication for the real economy. June 9, 214 Rakesh Mohan / IMF 13
Current Account Balances (Percent to GDP) Advanced economies 198-9 1991-97 1998-22 23-7 28-9 21-12 213 Germany 2.1-1. -.4 5.1 6.1 6.9 7.5 Japan 2. 2.3 2.6 3.9 3.1 2.3.7 United States -1.6-1.2-3.5-5.2-3.6-2.9-2.3 Emerging and developing economies Brazil -2.8-1.1-3.5 1.1-1.6-2.2-3.6 China. 1.3 2. 6.1 7.1 2.7 2.1 India -1.9-1. -.1 -.3-2.5-3.9-2. Indonesia -2.7-2.5 4.3 2. 1. -.6-3.3 South Africa.9.1 -.3-4. -5.6-3.2-5.8 Turkey -1.2-1.1 -.3-4.5-3.7-7.4-7.9 Widening of CADs in major EMEs since the NAFC Source: IMF June 9, 214 Rakesh Mohan / IMF 14
198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 US $ billion Percent to GDP International Monetary System: IMF Resources 9 8 7 6 1.4 1.2 1. 5 4 3 2 1.8.6.4.2. Quota Total Resources Quota Total Resources IMF quota resources not keeping pace with the growth in the global economy and capital flows limits IMF s capacity to respond to volatility in the IMS - heavy reliance on borrowed resources. Source: IMF. June 9, 214 Rakesh Mohan / IMF 15
Managing the International Spillovers (1) AE central bank interest rate actions Largely uncoordinated Except October 8, 28 - the immediate aftermath of the Lehman collapse a coordinated reduction of 25-5 basis points in policy interest rates by six AE CBs to ease global monetary conditions. By showing that policymakers around the globe were working closely together, had a similar view of global economic conditions, and were willing to take strong actions to address those conditions, coordinated action could help to bolster consumer and business confidence and so yield greater economic benefits than unilateral action (Board of Governors of the Federal Reserve System, 28b). Liquidity swaps Well coordinated, but largely restricted. Earlier occasions of coordinated actions: interest cut and liquidity provision by G-7 in response to the 1987 stock market crash in the US Exchange rate interventions: Plaza and Louvre accords June 9, 214 Rakesh Mohan / IMF 16
Managing the International Spillovers (2) Spillovers to EMDEs EME policymakers Complaints about UMPs Capital flow volatility exchange rates, domestic liquidity conditions, asset prices, credit and monetary aggregates, CAB Financial stability and growth implications June 9, 214 Rakesh Mohan / IMF 17
Managing the International Spillovers (3) AE policymakers: Agnostic about spillovers, UMPs are net positive for EMDEs It is true that interest rate differentials associated with differences in national monetary policies can promote crossborder capital flows as investors seek higher returns. But my reading of recent research makes me skeptical that these policy differences are the dominant force behind capital flows to emerging market economies; differences in growth prospects across countries and swings in investor risk sentiment seem to have played a larger role (Bernanke, 213). Need to factor in financial stability implications of volatile capital flows June 9, 214 Rakesh Mohan / IMF 18
Managing the International Spillovers (4) International Monetary Policy Committee (Eichengreen and others) Capital account management Regional financial arrangements CMIM, BRICS, ESFS/ESM,.. Currency swap lines by major AE central banks Risk mitigation for AE central banks EME reserve holdings June 9, 214 Rakesh Mohan / IMF 19
THANKS June 9, 214 Rakesh Mohan / IMF 2