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China, the US,  and Currency Issues Jeffrey Frankel Harpel Professor, Harvard University Chinese Future Leaders, January 29, 2010
Topics to be addressed ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
API-120 -  Macroeconomic Policy Analysis I   Professor Jeffrey Frankel,  Kennedy School of Government, Harvard University   US external deficits have shown a negative trend in the long run (1960-2007) temporarily interrupted in recessions of 1980, 1990, 2001, & 2008.  Previously CA>TB, due to intl. investment earnings.  Now reversed.
The US deficits improved in 2008-09,   but this will again be a temporary reversal, attributable to the US recession  (=> import quantities ↓ & oil prices ↓)   Trade & current accounts, in $ billions per quarter
Dangers of the U.S. trade deficit ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Policies to reduce the US deficit ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Critics of the twin deficits view say that the US current account deficit  is  sustainable. ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Exorbitant Privilege of $   ,[object Object]
When does the “privilege” become “exorbitant?” ,[object Object],[object Object],[object Object]
The “Bretton Woods II” hypothesis ,[object Object],[object Object],[object Object],[object Object]
My own view on “Bretton Woods II”: ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
There is no reason to expect better today: ,[object Object],[object Object],[object Object],[object Object],[object Object]
Central banks’ reserve holdings   Frankel & Chinn  (2007)   estimated effects of country size, market depth, ability to hold value, and network effects ,[object Object]
When will the day of reckoning come? ,[object Object],[object Object],[object Object],[object Object]
The global monetary system may move from dollar-based  to multiple international reserve currencies ,[object Object],[object Object],[object Object],[object Object],[object Object],SDR
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],From China’s  viewpoint,
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],What is in China’s interest?
Five reasons China should let RMB appreciate, in its own interest ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
1. Overheating of economy: ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Attempts at “sterilization,” to insulate domestic economy from the inflows ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
2. Foreign Exchange Reserves ,[object Object],[object Object],[object Object],[object Object],[object Object]
Source: HKMA, Half-Yearly Monetary and Financial Stability Report, June 2008 Components of China’s rising balance of payments  and the evolution of foreign exchange reserves
Attempts to sterilize reserve inflow: While reserves (NFA) rose rapidly, the growth of the monetary base was kept to the growth of the real economy – even reduced in 2005-06. Successful sterilization in China: 2005-06 In 2005-06 China was remarkably successful.
In 2007-08 China had more trouble sterilizing the reserve inflow ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Sterilization faltered in 2007 & 2008 Source: HKMA, Half-Yearly Monetary and Financial Stability Report, June 2008 Growth of China’s monetary base, & its components
China’s CPI accelerates in 2007-08   Inflation 2002 to 2008 Q1   Source: HKMA, Half-Yearly Monetary and Financial Stability Report, June 2008
3. Need a flexible exchange rate to attain internal and external   balance ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
China is now in the overheating  +  surplus quadrant of the Swan Diagram Spending  A Exchange rate  E  in RMB/$ YY: Internal balance Y  = Potential ED & TD ES & TD ES & TB>0 China 2010 BB: External balance CA =0 China 2002 ED & TB>0
4. Avoiding future crashes ,[object Object]
5. Longer-run perspective: Balassa-Samuelson relationship ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Estimation of B-S relationship for 2000 ,[object Object],[object Object],[object Object],[object Object],Frankel (2006) 118 countries, PWT
Does the Balassa-Samuelson  relationship have predictive power? ,[object Object],[object Object],[object Object]
What about China’s currency reform announced in July 2005? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
If China gave US politicians  what they say they want... ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Lesson: Be careful what you wish for.  You might get it ! $2½
http://ksghome.harvard.edu/~jfrankel/index.htm
Appendix 1:  The decade 2001-2010 Appendix 2: Looking forward ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Japan  (and the Asian NIEs)  were said to have  a superior model of capitalism ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
As soon as the 1990s started, 1980s assumptions were proven wrong ,[object Object],[object Object],[object Object],[object Object],[object Object]
And as the 1990s progressed, ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
But as soon as the 2000s started, the   1990s assumptions  were proven wrong ,[object Object],[object Object],[object Object],[object Object],[object Object]
Financial crisis (2007-2009) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Who got pieces of it right, beforehand? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The US has lost its claim  as an exclusive model for others to emulate ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Looking forward: The US is in a hole ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The same with other major industrialized economies. ,[object Object],[object Object],[object Object],[object Object],[object Object]
One of the most important developments of 2009: the G-20 supplanted the G-7 ,[object Object],[object Object],[object Object],[object Object],[object Object]

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Ss china the us & currencies harvard kennedy school presentation

  • 1. China, the US, and Currency Issues Jeffrey Frankel Harpel Professor, Harvard University Chinese Future Leaders, January 29, 2010
  • 2.
  • 3. API-120 - Macroeconomic Policy Analysis I Professor Jeffrey Frankel, Kennedy School of Government, Harvard University US external deficits have shown a negative trend in the long run (1960-2007) temporarily interrupted in recessions of 1980, 1990, 2001, & 2008. Previously CA>TB, due to intl. investment earnings. Now reversed.
  • 4. The US deficits improved in 2008-09, but this will again be a temporary reversal, attributable to the US recession (=> import quantities ↓ & oil prices ↓) Trade & current accounts, in $ billions per quarter
  • 5.
  • 6.
  • 7.
  • 8.
  • 9.
  • 10.
  • 11.
  • 12.
  • 13.
  • 14.
  • 15.
  • 16.
  • 17.
  • 18.
  • 19.
  • 20.
  • 21.
  • 22. Source: HKMA, Half-Yearly Monetary and Financial Stability Report, June 2008 Components of China’s rising balance of payments and the evolution of foreign exchange reserves
  • 23. Attempts to sterilize reserve inflow: While reserves (NFA) rose rapidly, the growth of the monetary base was kept to the growth of the real economy – even reduced in 2005-06. Successful sterilization in China: 2005-06 In 2005-06 China was remarkably successful.
  • 24.
  • 25. Sterilization faltered in 2007 & 2008 Source: HKMA, Half-Yearly Monetary and Financial Stability Report, June 2008 Growth of China’s monetary base, & its components
  • 26. China’s CPI accelerates in 2007-08 Inflation 2002 to 2008 Q1 Source: HKMA, Half-Yearly Monetary and Financial Stability Report, June 2008
  • 27.
  • 28. China is now in the overheating + surplus quadrant of the Swan Diagram Spending A Exchange rate E in RMB/$ YY: Internal balance Y = Potential ED & TD ES & TD ES & TB>0 China 2010 BB: External balance CA =0 China 2002 ED & TB>0
  • 29.
  • 30.
  • 31.
  • 32.
  • 33.
  • 34.
  • 35. Lesson: Be careful what you wish for. You might get it ! $2½
  • 37.
  • 38.
  • 39.
  • 40.
  • 41.
  • 42.
  • 43.
  • 44.
  • 45.
  • 46.
  • 47.