Peterson Institute Update

North Korea's Failed Currency Reform

On November 30, 2009, North Korea launched a surprise confiscatory currency reform aimed at cracking down on burgeoning private markets and reviving socialism. The move predictably set off chaos, and now it appears that the government is in retreat, acquiescing in the reopening of markets. The open question is what impact this episode may have for North Korea's looming leadership transition.

Op-ed by Marcus Noland.

Interview: China vs. the Rest of the World?

Arvind Subramanian argues that exporting countries in Asia, Africa, and Latin America have more reason than the United States to oppose China's artificially undervalued currency.

Policy Brief: Confronting Asset Bubbles, Too Big to Fail, and Beggar-thy-Neighbor Exchange Rate Policies [pdf]

The global financial crisis presents an opportunity—for the first time in many years—for wholesale reform of the international financial and monetary system. The root causes of the crisis, says Goldstein, can be found in both the financial and monetary spheres and so reforms must be prescribed for both. On the financial side, he emphasizes two problems: pricking asset price bubbles before they get too large and confronting "too big to fail" financial institutions. On the monetary side, he concentrates on what can be done to induce large, surplus economies to abandon now—and avoid in the future—beggar-thy-neighbor exchange rate policies.

Central banks and regulatory authorities need to try much harder to identify bubbles before they get too large and consider a better bubble-busting tool kit, which would include some combination of instruments such as regulatory capital and regulatory liquidity requirements, margin requirements, loan-to-value ratios on residential and commercial mortgages, and lending standards. To confront "too-big-to fail," if higher capital requirements for larger financial institutions are not enough, Goldstein prescribes taking together four policy measures: requiring all systemically important institutions to have wind-down plans that would prevent unacceptable spillovers; ensuring that special resolution authority exists for all systemically important financial institutions; designing resolution authority in a way that supports market discipline; and imposing explicit size limits on systemically important financial institutions relative to GDP.

Goldstein then draws attention to China's highly significant case of beggar-thy-neighbor exchange rate policy and the International Monetary Fund's abysmal surveillance of the problem. He recommends that the Fund become far tougher on errant countries than it is now. The Fund's engagement with members who have emerging exchange rate problems should be made less subject to politicization and long delays. There needs to be a workable framework for the Fund's exchange rate surveillance that is capable of sending the message that the Fund views the country's exchange rate policy not only as ill-advised but also as being inconsistent with the country's obligations as a member of the Fund and, hence, that the policy has to be changed. Finally, there needs to be a workable, graduated set of penalties for countries that refuse persistently to honor their international obligations on exchange rate policy.

Policy Brief 10-3 by Morris Goldstein.

It Is the Poor Who Pay for the Weak Renminbi

China's exchange rate policy has largely been viewed through the prism of global imbalances. That has had three unfortunate consequences. It has allowed China to deflect attention away from its policy. It has obscured the real victims of this policy. And it has made political resolution of this policy more difficult.

Op-ed by Arvind Subramanian.

Submission to the USTR in Support of a Trans-Pacific Partnership Agreement

We strongly support the US government decision to participate in negotiations for a Trans-Pacific Partnership (TPP). Deepening US engagement with countries in the Asia-Pacific region is crucial for the advancement of both US economic and foreign policy interests, and the TPP is the best way to pursue both goals. The US objective should be to reach agreement on a TPP including at least a dozen Asia Pacific countries, including Japan and Korea and at least one major ASEAN country as well as the eight that are currently committed to the initiative, by the time of the APEC Summit to be hosted by the United States in President Obama's home town of Honolulu in late 2011. In this brief submission, we summarize why the TPP is important for the United States, assess the key US objectives in advancing the TPP talks, and address the major challenges for US policy. We conclude with recommendations regarding the participation in and substantive coverage of the prospective pact.

Paper by C. Fred Bergsten and Jeffrey J. Schott.

How Best to Boost US Exports

President Obama has smartly suggested that a new export strategy could support 2 million very good American jobs, more than created by his stimulus initiative. The United States already sells about $1.5 trillion worth of goods and services annually to the rest of the world, which creates about 10 million high-paying jobs. Every $1 billion of additional exports will produce about 7,000 very good jobs. Robust export expansion would also reduce our large trade deficits and resultant need to borrow abroad to finance them.

Op-ed by C. Fred Bergsten.

News Release: Nicholas Lardy Appointed to New Chair in Honor of Anthony M. Solomon

The Peterson Institute for International Economics is pleased to announce the creation of an endowed chair in honor of the late Anthony M. Solomon and the appointment of Nicholas Lardy as the first scholar to hold the position. Dr. Lardy, who has been a senior fellow at the Institute since 2003, is widely regarded as one of the world's leading experts on the economy of China. In its recent comprehensive survey of experts on that country, the National Journal called Dr. Lardy "everybody's guru on China." His recent pathbreaking work on rebalancing China's economic growth and on its exchange rate policy has been extremely influential in the policy debates on those critical topics in both China and the United States. Dr. Lardy was the sixth most widely quoted think tank economist in the media during 1997–2005, the latest period for which such data are available, and is cited regularly in the pages of the world's financial press.

Read full news release.

View news release as a pdf.

RealTime: Move Your Politician's Money

I talked Sunday about Move Your Money with Guy Raz of NPR's Weekend All Things Considered. We covered a lot of ground, from what's in it for individuals to shift towards community banks and credit unions (better service and lower costs, in many cases) to how this could begin to reign in Too Big To Fail financial institutions (slowly, but surely). ...

RealTime post by Simon Johnson.

Interview: China's Persistently Undervalued Currency

John Williamson discusses PIIE's latest findings on China's currency practices, its undervalued renminbi, and the impact on US-China trade.

Too Big to Fail: Too Big to Solve?

Michael Mussa traces the history of US bank deregulation since the 1930s and assesses the prospects for reviving the Glass-Steagall Act and other curbs on the banking sector.

What Globalization Strategy for India?

All eyes are focused on the Reserve Bank of India (RBI) as it makes key decisions on liquidity and interest rates. These decisions, which will aim to head off the very real threat of overheating while maintaining reasonable growth, will define more broadly the exit strategy from the substantial policy support provided in the aftermath of the global financial crisis. Very senior government policymakers have been generous in offering public (and unsolicited) advice to RBI to the extent that markets have lurched between Delhi and Mumbai to read the tea leaves on the future course of monetary policy.

Op-ed by Arvind Subramanian.

How Will the Markets React to the Fed Appointment Process?

With all the current attention to the reappointment vote on Fed Chairman Bernanke, we would direct people to our recent paper, "Do Markets Care Who Chairs the Central Bank?", forthcoming in next month's issue of the Journal of Money, Credit, and Banking. In it, we make the first ever assessment of the effects of central bank governor appointments on financial-market expectations of monetary policy. To measure these effects, we assemble a new dataset of appointment announcements from 15 countries and conduct an event-study analysis on exchange rates, bond yields, and stock prices.

RealTime post by Adam S. Posen.

Interview: Europe's Struggle to Recover and Reform

Nicolas Véron says that while Europe was faster to address the economic downturn, the United States has gone further in proposing banking reforms.

Healthcare Reform Is the Second US Stimulus Package

Healthcare reform legislation—meaning extension of health insurance to millions of uncovered Americans—will pass the US Congress in some form soon, despite the Democrats' loss of a Senate seat. Even if partial at best, this is a long overdue catch-up of American social justice in an essential area with the rest of the civilized world. It will be a huge triumph and hugely expensive. �The loss of the Democratic super-majority makes it all the more likely that some insurance expansion will pass without being paid for upfront with cost savings and tax increases. What gets overlooked is that it will also have the effect of being the second US fiscal stimulus package following the global crisis, with substantial effects on the rest of the world as a result.

Op-ed by Adam S. Posen.

Interview: Reviving the US-Egypt Relationship

Barbara Kotschwar suggests several areas that could improve economic cooperation, trade, and investment with Egypt short of concluding a free trade accord.

Event: Jobs on Main Street, Customers Around the World: A Positive Trade Agenda for US Small- and Medium-Sized Enterprises

United States Trade Representative Ron Kirk held a conference aimed at helping small- and medium-sized businesses create jobs through exports. The event took place at the Peterson Institute for International Economics on Thursday, January 21, 2010. Featured participants at the conference were Administrator Karen G. Mills of the US Small Business Administration, Deputy Secretary of Commerce Dennis Hightower, and Deputy US Trade Representative Miriam Sapiro. Small- and medium-sized business panelists shared their export successes and discussed major policy barriers as well as key issues in export promotion.

Audio of the event is now available; video will be available in the near future.

Policy Brief 10-2: Notes on Equilibrium Exchange Rates: January 2010 [pdf]

In this update of estimates of fundamental equilibrium exchange rates (FEERs) for 30 major economies, Cline and Williamson report on changes in disequilibria in exchange markets since March 2009, the date to which their earlier (June 2009) calculations referred. The overvaluation of the dollar has been sharply reduced from March to the end of 2009, from about 17 percent to about 6 percent. The remaining overvaluation of the dollar would be completely eliminated if the five East Asian economies with seriously undervalued exchange rates were to appreciate to FEER-consistent levels: China (which needs the most appreciation), Hong Kong, Malaysia, Taiwan, and Singapore.

Cline and Williamson find that in the important case of the euro, whereas the currency was undervalued against the dollar by about 17 percent in March 2009, by end-December it had closed to about 7 percent below its FEER-consistent rate. Japan's bilateral undervaluation had also narrowed but only slightly. Several currencies have overshot from substantial undervaluation to overvaluation against the dollar, including those of Australia, New Zealand, South Africa, Brazil, Indonesia, Hungary, and Poland. These economies typically have high interest rates, and their substantial currency overshooting reflects the shift in the international financial environment from acute panic and safe-haven influences in early 2009 to carry-trade dynamics by the end of the year in the face of zero US short-term interest rates. Two key trade partners for the United States, Canada and Mexico, have both swung from modest undervaluation against the dollar to somewhat greater overvaluation. The authors conclude with a reestimation of the FEER-consistent dollar rate for one important currency, the Korean won, and conclude that its FEER-consistent rate is now about 1,000 won to the dollar.

Policy Brief 10-2 by William R. Cline and John Williamson.