Thursday 19 Jul 2018 | 07:47 | SYDNEY
Thursday 19 Jul 2018 | 07:47 | SYDNEY

The ins and outs of international money


Mark Thirlwell

25 September 2009 10:27

Jeffrey Frankel's blog led me to this thought-provoking paper in which he identifies eight concepts in international monetary economics moving from the status of virtually conventional wisdom to being on the way out, and eight concepts which he thinks are moving in the opposite direction. (In a snappier version of the paper written for the IMF’s Finance and Development, he slims the list to five ins and five outs). 

Here are Frankel's eight 'outs':

  1. The G-7: rendered anachronistic by the absence of the major emerging markets, especially China.
  2. The global savings glut: Frankel thinks it is set to be replaced by a global fall in national savings rates due to a combination of bigger fiscal deficits in the short run and demographic pressures in the long run.
  3. The 'corners hypothesis', sometimes known as the 'bipolar view': on its way out since the collapse of the Argentine currency board experiment, but now disproved as an empirical regularity by the actual choice of most countries.
  4. Proliferating currency unions: EMU may have recently and successfully celebrated its 10th birthday, yet the attraction of the model for others has waned, as seen for example in the failure of the Gulf version of the project.
  5. Inflation targeting (narrowly defined):  sunk by a combination of a ‘fear of floating’ and the GFC-demonstrated need to pay attention to asset prices.
  6. The exorbitant privilege of the US dollar: gradually being undermined by the rise of a credible challenger (the euro) and a steady decline in the greenback's value over time.
  7. Bretton Woods II: now in its final years thanks to high capital mobility and the inability of the US to rely on the sustained support of foreign creditor central banks on either economic or political grounds.
  8. Accusations of Chinese 'currency manipulation': likely to be replaced by a greater need for Washington to reassure Chinese buyers of treasury bills against a backdrop of soaring fiscal deficits.

And here are his 'ins':

  1. The G-20:  the replacement for the now-defunct G-7.
  2. The IMF: seen by many to have had a good crisis, and thanks to the G-20's London summit, set to benefit from a tripling of its lending capacity.
  3. Special Drawing Rights (SDR): making a surprise comeback due in part to support from China’s central bank, although Frankel is pretty cautious about its chances as serious contender for reserve currency status.
  4. The credit cycle: post-GFC, central banks will have to broaden their focus beyond a narrow definition of inflation to include asset prices, and be prepared to identify and prick speculative bubbles.
  5. Foreign exchange reserves: the experience during the GFC of developing countries that self-insured by building up large stocks of reserves suggests to Frankel that they were smarter than the academic economists who had argued that these same countries were holding far more reserves than they needed.
  6. Intermediate exchange regimes: the corollary of 'out' number 3.
  7. Commodity currencies (including the A$): a reversal of the 1990s position, when bulk (food, minerals, oil) was out, and weightless IT technology was in.
  8. Multiple reserve currency system: Frankel reckons pressures on the dollar, the rise of the euro, the SDR's surprise comeback, and renewed interest in both the yen and the barbarous relic together herald the arrival of a system of multiple reserve currencies.