Capital controls

U.S. Monetary Policy Spillovers

Do changes in U.S. dollar interest rates have a material impact on financial conditions elsewhere in the world? The answer is a resounding yes (see the paper one of us presented at this month’s IMF Annual Research Conference). When the Federal Reserve eases, the result is a dramatic increase in financial system leverage in other countries. Not only that, but the impact is larger than that of domestic policy changes.

The outsized cross-border impact of U.S. monetary policy creates obvious challenges for policymakers abroad aiming to maintain financial stability. Governments in the countries most affected have few options to limit the risks created by cyclical changes in dollar interest rates. The available mix of prudential measures includes more stringent capital requirements, limits on foreign currency liabilities, and restrictions on cross-border capital flows. The alternative of trying to counter U.S. monetary stimulus through higher policy interest rates abroad may backfire….

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Italeave: Mother of all financial crises

After years of calm, fears of a currency redenomination—prompted by the attitudes toward monetary union of Italy’s now-governing parties and the potential for another round of early elections—revived turbulence in Italian markets last week. We have warned in the past that an Italian exit from the euro would be disastrous not only for Italy, but for many others as well (see our earlier post).

And, given Italy’s high public debt, a significant easing of its fiscal stance within monetary union could revive financial instability, rather than boost economic growth. Depositors fearing the introduction of a parallel currency (to finance the fiscal stimulus) would have incentive to shift out of Italian banks into “safer” jurisdictions. Argentina’s experience in 2001, when the introduction of quasi-moneys by the fiscal authorities undermined monetary control, is instructive….

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Bitcoin and Fundamentals

Bitcoin is all the rage, again. Last week, the price rose above $10,000 for the first time. Following a Friday announcement by the Commodity Futures Trading Commission, the Chicago Mercantile Exchange, the CBOE Futures Exchange, and the Cantor Exchange appear poised to launch Bitcoin futures or other derivatives contracts, with Nasdaq likely to follow. Portfolio advisers are encouraging cryptocurrency diversification. In London’s Metro, advertisements assure potential investors that “Crypto needn’t be cryptic.” And, as skyrocketing prices gain headlines, less sophisticated investors are diving in.

The danger is that investors will interpret the surging price itself (and the associated hullabaloo) as a sufficient signal to buy, fueling an asset price bubble (and, eventually, a painful crash).

No one can ever say with certainty when an asset price boom is a bubble. Nevertheless, it makes sense to ask what fundamental services Bitcoin provides. More specifically, have the prospects for those services improved sufficiently over the past year to warrant the 10-fold increase in price that has vaulted Bitcoin’s market capitalization into the range of the top 50 U.S. firms?

We strongly doubt it....

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What Bitcoin Has Become

We are now in the ninth year of Bitcoin, the first coins (or “Genesis Block”) having been mined (that is, awarded for solving a computational problem) on January 3, 2009. Yet, Bitcoin has clearly failed to meet the grandiose aims of its advocates. Unlike conventional money, it is not widely used as a means of exchange. And, despite claims that its independence of government would make it a stable store of value, it remains anything but.

Instead, the evidence we can find hints that its primary use is to evade capital controls (or, possibly, as an alternative store of value in a repressed financial system). The greatest achievement associated with Bitcoin is not the currency itself, but the blockchain—the distributed ledger technology underlying it—that is now being widely explored in the hopes of slashing costs and improving services in finance and a range of other activities (see our earlier post).

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China's Awkward Exchange Rate Regime: an Update

As 2016 draws to a close, it’s natural to look back over the year’s posts. With all the swirling concerns about China-U.S. relations—including the selection of the protectionist co-author of Death by China to head a new White House National Trade Council—we wondered whether our February doubts about China’s exchange rate regime remain intact.

The answer is yes, but for reasons radically inconsistent with President-elect Trump’s promise to declare China a currency manipulator on his first day in office. Like any country with a fixed exchange rate, China’s central bank intervenes actively to maintain its (evolving) currency target. But, for the past two years, the People’s Bank has been intervening to prevent (or at least to slow), rather than promote, the depreciation of its currency versus the dollar. That is, the RMB remains overvalued compared to what it would be in the absence of official intervention.

And, despite secretive instincts of China's authorities, the evidence is there for all to see....

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China's Awkward Exchange Rate Regime

A recent op-ed in a major Chinese English-language newspaper, The People’s Daily, asserts that George Soros “has declared ‘war’ on China, claiming he had sold short Asian currencies.” For those who observed firms like those of Mr. Soros profiting from the collapse of the British pound in 1992, a speculative attack on China’s currency, the RMB, merits close attention.

There are surely parallels to that earlier episode where Soros' firm is reputed to have made $1 billion in a couple of days. Yet, it would be difficult to overlook the enormous differences. Perhaps most important, the United Kingdom was committed to maintaining the free flow of capital across its borders. This is in stark contrast to China, where policymakers have been tightening capital controls in recent months....

 

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It's a small world (after all)

Originally built for the 1964 New York World’s Fair, the “It’s a small world” exhibition re-opened at Disneyland two years later in 1966. At the time, the international monetary system was characterized by fixed exchange rates and widespread capital controls.

A half century later, global finance has been transformed so that exchange rates are now mostly flexible and cross-border capital mobility is generally high. As they say in Disneyland, it’s a small world after all...

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Is China's devaluation a game changer?

Since 1978, China has engaged in an unprecedented and wildly successful experiment, moving gradually from a command economy to one based on markets; in small steps transforming a system where administrators controlled the goods that were produced to one where prices allocate resources. There were surely miscalculations along the way. But, even big blunders could largely be concealed. Until now!

What has changed in recent months? The day has come for China to become more closely integrated into the global financial system, and this has a number of implications. The most important is that as prices and quantities of financial assets (rather than goods) are determined in markets, bureaucrats lose a great deal of control. But, as recent events very clearly demonstrate, Chinese authorities are reluctant to let go....

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A Swiss Lesson in Time (Consistency)

You can set your watch by the Swiss trains. They are the envy of the world in many ways. Everyone believes that the trains will run on time because they do.

Credibility is at the core of central banking as well. When a credible central banker speaks, households, businesses, and governments listen. And, because they expect the banker to do what she says, their response – measured in terms of how much they work, save, and invest – will reinforce the outcome policymakers seek.

But credibility is tough to earn and – as the Swiss National Bank (SNB) recently learned when it ended a three-year commitment to prevent a rise in the franc versus the euro – easy to lose....

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To RMB or not to RMB? Lessons from Currency History

China is the world’s largest trader and (on a purchasing power parity basis) is about to surpass the United States as the world’s largest economy. China already accounts for about 10% of global trade in goods and services, and over 15% of global economic activity.

So, as China takes its place as the biggest economy on the globe, will its currency, the renminbi (RMB), become the most widely used international currency as well? Will the RMB supplant the U.S. dollar as the leading reserve currency held by central bankers and others, or as the safe-haven currency in financial crises?

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