Dollars, Debt, and Deficits Sixty Years after Bretton Woods

404 Pages·2013·24.21 MB·English

Dollars, Debt, and Deficits
Sixty Years after Bretton Woods
Conference Proceedings
Banco de España
International Monetary Fund
©International Monetary Fund. Not for Redistribution
© 2005 International Monetary Fund
Production: IMF Multimedia Services Division
Cover: Jorge Salazar
Dollars, debt and deficits : sixty years after Bretton Woods : conference
proceedings -
[Washington, D.C.] : International Monetary Fund : Banco de España, [2005]
p. cm.
Organized by Banco de España and the International Monetary Fund.
ISBN 1-58906-453-4
1. International finance — Congresses. 2. Dollar — Congresses. 3. Debt —
Congresses. 4. Foreign exchange rates —Congresses. 5. International Monetary Fund
Congresses.
I. International Monetary Fund. II Banco de España.
HG3881.D67 2005
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recycled paper
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Contents
List of Participants v
Foreword vii
Rodrigo deRato and Jaime Caruana
• INTRODUCTION 1
Raghuram Rajan and Jose Vinals
• OPENING SPEECHES
Rodrigo de Rato 11
Pedro Solbes 17
Jaime Caruana 21
• BLOCK I: GLOBAL IMBALANCES, EXCHANGE RATE
ISSUES, AND DEBT
Session 1; Global Imbalances
A Map to the Revised Bretton Woods End Game: Direct Investment,
Rising Real Wages, and the Absorption of Excess Labor in the Periphery 29
Michael P. Dooley, David Folkerts-Landau, and Peter Garber
Macroeconomic Dynamics and the Accumulation of Net Foreign
Liabilities in the US: An Empirical Model 47
Giancarlo Corsetti and Panagiotis Th. Konstantinou
Session 2; Exchange Rate Issues
Financial Globalization and Exchange Rates 93
Philip R. Lane and Gian Maria Milesi-Ferretti
What Makes Balance Sheets Effects Detrimental for the
Country Risk Premium? 135
Juan Carlos Berganza and Alicia Garcia Herrero
Session 3; Debt in Emerging Economies
Public Debt, Fiscal Solvency, and Macroeconomic Uncertainty in
Latin America: The Cases of Brazil, Colombia, Costa Rica and Mexico 165
Enrique G. Mendoza and Pedro Marcelo Oviedo
Exchange Rate Regimes and Debt Maturity Structure 197
Matthieu Bussière, Marcel Fratzscher, and Winfried Koeniger
Contributions;
Daniel Cohen (discussant) 213
Stanley Fischer (panelist) 215
Malcom Knight (panelist) 219
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• KEYNOTE SPEECHES
Agustin Carstens 233
Jean-Claude Trichet 237
• BLOCK II: INTERNATIONAL FINANCIAL ARCHITECTURE
Session 4; The Role of the IMF
A Model of the IMF as a Coinsurance Arrangement 249
Ralph Chami, Sunil Sharma, and Ilhyock Shim
The IMF in a World of Private Capital Markets 291
Barry Eichengreen, Kenneth Kletzer, and Ashoka Mody
Session 5; Innovations in Private and Multilateral Lending
Dollars, Debt, and the IFIs: Dedollarizing Multilateral Lending 325
Eduardo Leyy-Yeyati
Optimal Collective Action Clause Thresholds 363
Andrew G. Haldane, Adrian Penalver, Victoria Saporta,
and Hyun Song Shin
Contributions;
Lorenzo Bini-Smaghi (discussant) 383
John Murray (discussant) 3 87
Guillermo Ortiz (panelist) 391
IV
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List of Participants
Enrique Alberola, Unit Manager, Banco de Espaiia
Juan Carlos Berganza, Economist, Banco de Espaiia
Lorenzo Bini-Smaghi, Director General, Italian Ministry of Economy and Finance
Jorge Blazquez, Advisor, Economic Office of the President of the Spanish Government
Geoffrey H. Board, Board Chief Representative, Reserve Bank of Australia
Jan Brockmeyer, Deputy Executive Director, De Nederlandsche Bank
Ariel Buira, Director of the G-24 Secretariat
Matthieu Bussiere, Senior Economist, European Central Bank
William Calvo, Chief Economist, Banco Central de Costa Rica
Jose Manuel Campa, Professor, IESE
Agustin Carstens, Deputy Managing Director, International Monetary Fund
Jaime Caruana, Governor, Banco de Espaiia
Miguel de las Casas, Economist, Banco de Espaiia
Michael Casey, Head of the Funds Supervision, Central Bank & Financial Services Authorities of
Ireland
Ralph Chami, Division Chief, International Monetary Fund
Roberto Cippa, Director of International Monetary Relations, Swiss National Bank
Kenneth Coates, Director, Centre for Latin American Monetary Studies
Daniel Cohen, Professor, Ecole Normale Superieure
Giancarlo Corsetti, Professor, European University Institute
Daniel Daco, Head of Division, European Commission
Thomas Dawson, Head of the External Relations Department, International Monetary Fund
Guillermo de la Dehesa, Member of the Board, AVIV A
Michael Dooley, Professor, University of California and Deutsche Bank Special Advisor
Sonsoles Eirea, Economist, Banco de Espaiia
Santiago Elorza, Technical Advisor, Spanish Ministry of Economy
Yuchuan Feng, Deputy Governor's Assistant, People's Bank of China
Roger Ferguson, Vice Chairman, Board of Governors of the Federal Reserve System
Vicente Javier Fernandez, Advisor, Spanish Secretariat of State for the Economy
Santiago Fernandez de Lis, Director of the International Economics and International Relations
Department, Banco de Espaiia
Inigo Fernandez de Mesa, Deputy Director General of EMU Affairs, Spanish Ministry of Economy and
Finance
Stanley Fischer, Member of the Board, Citigroup Inc.
Allen Frankel, Head of the CGFS, Bank for International Settlements
Marcel Fratzscher, Senior Economist, European Central Bank
Luis de Fuentes, Deputy Director General, Spanish Ministry of Industry, Trade and Tourism
Peter Garber, Global Strategist, Deutsche Bank
Alicia Garcia Herrero, Head of Division, Banco de Espaiia
Luis Garcia Lombardero, Advisor, Spanish Secretariat of State for the Economy
Jose Garcia Solanes, Professor, University of Murcia
Francisco Gismondi, Director of Macroeconomic Analysis, Banco Central de la Republica Argentina
Giorgio Gomel, Director of International Affairs, Banca d'ltalia
Jane Haltmaier, Division Chief, Board of Governors of the Federal Reserve System
Herve Hannoun, Deputy Governor, Banque de France
Claudio Irigoyen, Director of Monetary and Financial Policy, Banco Central de la Republica Argentina
Zhongxia Jin, Director General of the International Department, People's Bank of China
Alfred Kammer, Deputy Managing Director's Advisor, International Monetary Fund
Kenneth Kletzer, Professor, University of California
Malcolm Knight, General Manager, Bank for International Settlements
Panagiotis Konstantinou, RTN Research Fellow at the University of Rome III
Philip Lane, Director of the HIS, Trinity College Dublin and CEPR
Nuno Leal de Faria, Deputy Director of the International Relations Department, Banco de Portugal
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Eduardo Levy Yeyati, Professor, University Torcuato Di Telia
Ruogu Li, Deputy Governor, People's Bank of China
Zhengming Liu, Chief Representative, People's Bank of China Representative Office in Frankfurt
Jose Luis Malo de Molina, Director General of Economics, Statistics and Research, Banco de Espafia
Luis Marti, Executive Director, International Monetary Fund
Manuel Martinez, Economist, Banco de Espafia
Aurelio Martinez Estevez, Professor, University of Valencia
Jose R. Martinez Resano, Economist, Banco de Espafia
Enrique Mendoza, Professor, University of Maryland
Gian M. Milesi-Ferretti, Division Chief, International Monetary Fund
Ashoka Mody, Division Chief, International Monetary Fund
Joaquin Muns, Member of the Board, Banco de Espafia
John Murray, Advisor, Bank of Canada
Michael Mussa, Senior Fellow, Institute for International Economics
Franz Nauschnigg, Head of Division, Oesterreichische National Bank
Emilio Ontiveros, Member of the Board, API
Guillermo Ortiz, Governor, Banco de Mexico
Adrian Penalver, Economist, Bank of England
Jose Perez, President, Intermoney
Kristina Persson, Deputy Governor, Sveriges Risksbank
Jean Pisani-Ferry, Professor, University of Paris-Dauphine
Richard Portes, Professor, London Business School and CEPR
Federico Prades, Advisor, AEB (Spanish Banking Association)
Raghuram Raj an, Economic Counsellor and Director of Research, International Monetary Fund
Rodrigo de Rato, Managing Director, International Monetary Fund
Luis Ravina, Rector, University of Navarra
Carmen Reinhart, Professor, University of Maryland
Rafael Repullo, Director, CEMFI
Jose Juan Ruiz, Head of Department, Santander Central Hispano
Juan Ruiz, Economist, Banco de Espafia
Sinikka Salo, Member of the Executive Board, Suomen Pankki
Javier Santiso, Chief Economist for Latin America and Emerging Markets, BBVA
Jesus Saurina, Head of Division, Banco de Espafia
Miguel Savastano, Division Chief, International Monetary Fund
Miguel Sebastian, Director of the Economic Office of the President of the Spanish Government
Sunil Sharma, Division Chief, International Monetary Fund
Pedro Solbes, Second Vice President of the Spanish Government and Minister for Economy and Finance
Alberto Soler, Advisor, Spanish Ministry of Economy and Finance
Michel Soudan, Assistant of the International Service, National Bank of Belgium
Marc Olivier Strauss-Kahn, Director General, Banque de France
Gyorgy Szapary, Vice President, Central Bank of Hungary
David Taguas, Economist, BBVA
Fernando Tejada, Head of Division, Banco de Espafia
Panayotis Thomopoulos, Deputy Governor, Bank of Greece
Jens Thorn sen, Member of the Board, Danmarks Nationalbank
Jean-Claude Trichet, President, European Central Bank
Juan Jose Toribio, Director, IESE
Jose Uribe, Head of the Management Office, Banco de la Republica de Colombia
Pierre Van der Haegen, Director General of International and European Relations, European Central
Bank
Felix Varela, Head of Research and International Economy, University of Alcala
Manuel Varela, Emeritus Professor, University Complutense Madrid
Fernando Varela, Former Executive Director, International Monetary Fund
David Vegara, Secretary of State for the Economy
Jaume Ventura, Professor, University Pompeu Fabra
Pedro Pablo Villasante, Director General of Banking Supervision, Banco de Espafia
Jose Vinals, Director General of International Affairs, Banco de Espafia
Regine Wolfinger, Economist, European Central Bank
VI
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Foreword
Concerns over the major challenges the international monetary and financial system
currently faces and the attendant debate on the policy-related and academic facets of
the international financial architecture have arisen from the lessons imparted by the
financial crises of recent years and from the need to redefine the international financial
community's strategies and strengthen crisis-prevention mechanisms. A new landmark
in this connection has been the international conference Dollars, Debt and Deficits:
Sixty years after Bretton Woods, which took place at the Banco de Espafia headquarters
on 14-15 June 2004. The conference was jointly organized by the Banco de Espafia and
the International Monetary Fund (IMF).
The conference commemorated the 60th anniversary of the Bretton Woods
meetings in July 1944. These meetings were one of the most significant events for the
world economy in the last century and gave rise to the birth of an economic, monetary
and financial system that has played a crucial role in promoting economic and financial
stability, improving global welfare, and alleviating poverty. Representatives from 45
countries met at Bretton Woods against the backdrop of a world economy devastated
by war and marked by protectionist trade policies and unstable exchange rates. The
foundations were laid there for a stable framework of economic cooperation and an
international financial and monetary system, and two institutions which have proved
pivotal for the attainment of these goals were created: the IMF and the International
Bank for Reconstruction and Development, later the World Bank.
Spain's growing ties with the Bretton Woods institutions reached a high in
autumn 1994 when Madrid hosted the IMF/World Bank annual meetings, coinciding
with the 50th anniversary of the agreements. Marking another pinnacle was the IMF's
obliging acceptance of the proposal to commemorate the 60th anniversary with the
organization of an international conference at the Banco de Espafia. Significantly, this
has been one of the few occasions on which the IMF has decided to hold a meeting of
this nature outside its Washington headquarters.
Conference preparations were set in train in December 2003, when the co-
organizers made a call for papers to the academic community for contributions on
economic development, policy measures and implications of debt sustainability,
exchange rates and global imbalance in the capital account, debt and exchange rate
crises, crisis-resolution strategies, the relationship between the adopted exchange rate
regime and economic development, the link between fiscal development and exchange
rate regimes, and regional integration and the main international currencies. The
selection of contributions from among those received was by a committee made up of
representatives from the IMF and the Banco de Espafia. The committee was pleasantly
surprised by the number and quality of the contributions submitted, ten of which were
finally chosen. For the session chairs, discussants and expert panels, prestigious
academics and expert staff from central banks, international agencies and economic
research institutes were called upon. The outcome was a high-quality program that
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generated notable expectations about the conference, expectations which were more
than fulfilled thanks to the calibre of the participants and the results of the debates.
Among conference speakers and participants, a significant total of 27 countries were
represented.
The conference was therefore an excellent opportunity to reflect on the major
challenges currently facing the international monetary and financial system and on the
future role of the Bretton Woods institutions. It has provided for better understanding
of the development of and changes in the international financial architecture and has
helped offer a perspective as to how a global response should be designed in the future
to avert the perverse effects of crises on the world economy. The conference also
allowed a fruitful exchange of views on exchange rate fluctuations in an increasingly
integrated world economy, the consequences of political uncertainty and other issues
relating to exchange rates, and the term structure of interest rates and the sustainability
of public debt.
The main contributions and debates turned on the dynamics of international
disequilibria, such as the US external deficit, the effects of exchange rate fluctuations,
the impact of uncertainty on public and private external debt, the role of the IMF and of
international financial institutions in reducing emerging economies' foreign currency
financing needs, and the prospects for the international financial architecture in light of
the emergence of new international lending instruments and mechanisms.
In sum, the tight but stimulating conference agenda highlighted once again the
need for national authorities and international financial institutions to coordinate their
work in areas of common interest, harnessing their experience and comparative
advantages, and providing the degree of technical rigour needed to address global
financial problems.
Rod rigo de Rato Jaime Caruana
IMF Managing Director Governor of the Bank of Spain
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Introduction
Raghuram Raj an
International Monetary Fund
Jose Viiials
Banco de Espana
In their opening remarks given to the Conference, Rodrigo Rato, Pedro Solbes and
Jaime Caruana reviewed the history and future challenges of the IMF sixty years after
its creation. They emphasize the role of the IMF in monitoring the financial system, and
in preventing and managing financial crises, stressing the importance of coordination
between international financial institutions (IFIs), national authorities, central banks,
and supervisory agencies. The main discussions gathered in this book focus on issues
related to debt, deficits, exchange rates, and the international financial architecture,
with authors underscoring the importance of these topics for the future configuration of
the international monetary system.
Block I: Global Imbalances, Exchange Rate Issues, and Debt
The dynamics of global imbalances, with special attention to the US and China, is the
first topic of debate in this book. The paper by Michael Dooley, David Folkerts-
Landau, and Peter Garber outlines the process for a smooth adjustment of global
imbalances, especially in China, in contrast with the alternative scenario of a sudden
and disorderly exchange and interest rate correction.
The key hypothesis at the heart of their prediction of an orderly adjustment is
that periphery governments (in particular, China) will gradually adjust their policies
before the onset of speculative capital flows. Financial policies in these countries are
seen as a component of a more general portfolio management policy with the objective
of creating an efficient domestic capital stock at the end of the process. In this paper's
view, intervention in financial markets is an important part of their development
strategy, and thus it will continue to be large and persistent enough to generate
predictable deviations of exchange rates and nominal wages from normal cyclical
patterns.
In particular, in the case of China, a gradual adjustment of real wages through
inflation and nominal exchange rate targeting will allow China to attain two main
objectives: (i) absorb 200 million rural workers into the industrial sector, which will
ease political pressures and increase those workers' productivity, and (ii) attain an
efficient capital stock at the end of the adjustment period, so that China can be
competitive in international markets without the need of distorted prices.
The challenge of absorbing these vast quantities of labor in China is to set up a
sharing of the benefits with the country importing an increasing flow of Chinese goods
(e.g., the US), as this "beggar-thy-neighbor" policy might disrupt the importing
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