Transcript Perspectives on the Current International Financial and Macroeconomic Situation Celebrity Speakers Ltd., London, May 14, 2007 Jeffrey Frankel Harpel Professor of Capital Formation and Growth Harvard.

Perspectives on the Current
International Financial and
Macroeconomic Situation
Celebrity Speakers Ltd., London, May 14, 2007
Jeffrey Frankel
Harpel Professor of Capital Formation and Growth
Harvard University
Four points to be covered
•
•
•
•
Emerging markets are now in the boom
phase of the 3rd consecutive 15-year
emerging-market cycle.
“Is this time different?”
China: the miracle is real
but the RMB is wrong
Commodities and carry trade
Twin deficits:
Is US losing economic hegemony?
2
We are now in
the 3rd big consecutive cycle of
capital inflows to developing countries
It’s the biblical rule:
7 fat years followed by 7 lean years
1) Recycling petrodollars: 1975-81
– 1982 international debt crisis,
then 7 lean years:
-1989
2) Emerging market boom: 1990-96
– 1997 East Asia crisis,
then 7 lean years:
-2003
3) Current boom, 2003-
3
The cycles show up in capital flow quantities
Capital Inflows to Developing Countries as percent of Total GDP
(Low and Middle Income)
5.00
4.50
4.00
3.50
Net Total Private
Capital Flows
3.00
2.50
3r
d
2.00
1.50
1.00
Net Foreign Direct
Investment Flows
1st boom
0.50
2nd boom
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
-
Source: World Development Indicators
4
They also show up in prices: sovereign spreads.
EMBI was up in 1995 & 98;
Calvo, BIS, 2006
down in 2003-07
The Economist 2/22/07
5
Is “this time different”?
• Ken Rogoff* says “no.”
• Some things are different this time:
– Current accounts are stronger (esp. Asia)
– Reserve holdings are much higher.
– Exchange rates are more flexible.
– More countries issue debt in domestic currency,
vs.$ (in part due to exchange rate volatility)
– More debt carries Collective Action Clauses
– More openness to trade and FDI.
* ”This Time It’s Not Different,” Newsweek International, Feb.16, 2004
6
Most large emerging markets are not using
the capital inflows to finance CA deficits
as much as they did in the 1990s
10
Malaysia
Average CA/GDP(%): 2000-04
8
6
4
Indonesia
2
Argentina
0
SSouth Africa
-10
-9
-8
-7
-6
-5
-4
-3
Ecuador
Mexico
CAD 2000-04 < in 90s
-2
-1
0
-2
Brazil
Turkey
-4
-6
CAD 2000-04 > in 90s
-8
-10
Average CA/GDP (%): 1990-99
7
Instead, countries are using the inflows
to build up forex reserves
Flows to Developing Countries
(Low- & middle-income),
Current Account, Capital Account and Change in Reserves as a % of Total GDP
6.00
1982-2004
Change in Total Reserves
Net Total Private
Capital Flows
5.00
4.00
(Including Gold)
3.00
2.00
1.00
-
(1.00)
Net Trade in Goods & Services
(2.00)
Source: World Development Indicators
8
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
(3.00)
Export/GDP ratios 2000-04 > than in 1990s
40
More
open
Average Export/GDP(%): 2000-04
35
30
Indonesia
South Africa
Turkey
Ecuador
Mexico
25
Argentina
20
15
Brazil
Less
open
10
5
0
0
5
10
15
Average Export/GDP (%): 1990-99
20
25
30
35
9
New emerging market crises will come; but
• they won’t necessarily take currency crisis form
(vs., e.g., crashes in land & securities markets).
• they won’t necessarily be soon:
– Emerging markets not yet ripe for a new crisis round
• Memories are still fresh.
• Traders’ jobs have not yet turned over.
– Global monetary policy has been easy (as in the boom
phases of the late 1970s & early 1990s).
– Commodity prices are still near historic peaks
10
China
• China, in its own interest, should let the RMB appreciate.
• Despite July 2006, the regime has not genuinely changed.
• A global cooperative deal would simultaneously appreciate
the RMB & other currencies among Asian and oil-exporters,
while the US raised national saving.
– IMF could broker the deal. But it won’t happen.
• The Chinese growth miracle will probably encounter a crash
somewhere along the road
– the banking system, real estate, or stock market.
• Every new economic power goes through a rite of passage:
financial bubble and crash.
11
Every new economic power goes through
a rite of passage: financial bubble and crash
Holland
Great US
Britain
Japan
China
Take-off
dates
Change
in GDP
16th
17th
century century
19th
century
1950s1980s
Current
X3
X6
X8
X10
(1870-1913)
(1950-1973)
Bubble
Dutch South Roaring Late
tulip
seas
20s
1980s
mania bubble (stocks & (stocks &
Crash
X6
(1500-1600) (1600-1820)
1637
1720
Fla. land)
land)
1929
1990s
2006(stocks, real
estate, &
banks)
?
12
Why did prices of oil & other commodities
rise so much 2001-06?
• E.g., Copper, platinum, nickel & zinc all hit record highs in
2006
• Mankind has to live in the physical world after all !
• Many causes. One neglected cause is monetary policy:
high real commodity prices can reflect low real interest rates.
•
High interest rates reduce the demand for storable
commodities, or increase the supply through a variety of
channels:
1. By increasing incentives for extraction today rather than tomorrow
2. By decreasing firms’ desire to carry inventories
3. By encouraging speculators to shift from commodities to T bills
13
Statistical relationship 1950-2005.
CRB Commodity Price Index vs. Real
Interest Rate
Annual, 1950-2005
Log Real Commodity Price Index
2.0
1.5
1.0
0.5
0.0
-7.5
-5.0
-2.5
0.0
2.5
Real Interest Rate
Source: Global Financial Data Inc.
5.0
7.5
14
Results of regressing $ real commodity
prices against US real interest rates
• Statistically significant at 5% level
for all 3 major price indices available since 1950-- from Dow
Jones, Commodity Resources Board, & Moody’s -- and
significant for 1 of 2 with a shorter history (Goldman Sachs).
• All are of hypothesized negative sign.
• The estimated coefficient for the CRB index,
-.06, is typical.
=> when the real interest rate goes up 100 basis
pts., real commodity price falls by .06, i.e., 6 %.
15
UK regression: real commodity prices
in £ on real interest rates
Short Rates
US r
Coeff.
s.e.
-0.053*
0.010
r differential
-0.086*
0.007
Long Rates
US r
r differential
-0.106*
-0.023*
0.007
0.006
* indicates coefficient significant at 5%.
(Robust s.e.s)
16
• Theory: Dornbusch overshooting model, with
spot price of commodities replacing exchange
rate, and convenience yield replacing foreign
interest rate.
• Implication: beginning in 2001, easy monetary
policy & low real interest rates among the FRB,
BoJ, ECB & PBoC sent liquidity into commodity
markets, pushing up real prices.
• Similar “carry-trade” arguments apply to other
markets as well: has sent money not only into
commodities, but also into housing, securities,
and emerging markets.
• This phenomenon may start to reverse.
17
It is still puzzling that long-term interest
rates remained so low, even as shortterm rates rose 2004-2006
• spreads on high-income corporate debt in particular
have been inexplicably low.
• Implied options price volatilities have been too low.
• Private equity may also be overdone.
• Part of a general pattern: private markets are
underestimating risk
– a result of 5 years of low real interest rates & of
formulas that estimate volatility from lagged prices –
which look calm – rather than from an intelligent
assessment of the macro outlook & the odds of
unexpected shocks.
• Private markets may in particular be under-estimating
future budget deficits.
• In short, both risk curve & yield curve are too flat.
18
Medium-term global risks
• Bursting bubbles
– Housing market downturns, underway
– Bond market crash, not yet
• Possible new oil shocks,
– e.g., from Russia, Venezuela, Nigeria, Iran…
• Possible new security setbacks
– Big new terrorist attack, perhaps with WMD
– Korea or Iran go nuclear/and or to war
– Islamic radicals take over Pakistan, S.A. or Egypt
• Hard landing of the $: foreigners pull out =>
$↓ & i↑
=> possible return of stagflation .
19
The US Current Account Deficit:
Origins and Implications
Revsied version of Our Fiscal Future, 2006
Trade balance is deteriorating
U.S. Trade Balance and Current Account
Balance, 1960-2004
% of
GDP
2.00
1.00
0.00
-1.00
.
-2.00
-3.00
Balance on goods and services expressed
as a share of GDP
-4.00
Current account balance expressed as a
share of GDP
-5.00
-6.00
-7.00
1960
1964
1968
1972
1976
1980
1984
Sources: Department of Commerce (Bureau of Economic Analysis) U.S. Economic Accounts
1988
1992
1996
2000
2004
21
Trade deficit
• Current account deficit for 2006 ≈ 6% GDP, a record.
– Would set off alarm bells in Argentina or Brazil
• Short-term danger:
Protectionist legislation,
such as Schumer-Graham bill scapegoating China
• Medium-term danger:
– CA Deficit => We are borrowing from the rest of the world.
– Dependence on foreign investors may => hard landing
• Long-term danger:
– US net debt to RoW now ≈ $3 trillion.
– Some day our children will have to pay it back
=> lower living standards.
– Dependence on foreign central banks
22
may => loss of US global hegemony
The Bush Budget Bungle
23
Official forecast of US budget
deficit vanishing by 2012 is fantasy
24
White House forecast of eliminating
budget deficit by 2012 will not be met
under their policies
• WH and CBO projections still do not allow for
–
–
–
–
The full cost of Iraq and other “national security” spending
Fixing the Alternative Minimum Tax
Making permanent the tax cuts as it has asked for
More realistic forecasts of spending growth, e.g., in line
with population. (Actually spending growth since 2001 has
far exceeded that.)
• More likely, deficits will not fall at all.
• Just as the budget forecasts were predictably
overoptimistic throughout the first Bush term.
– The surplus of $5 trillion+ forecasted in Jan. 2001 over 10 years
became a 10-year deficit of $5 trillion.
25
Further, the much more serious
deterioration will start after 2009.
• The 10-year window is no longer reported
in White House projections
• Cost of tax cuts truly explodes in 2010 (if
made permanent), as does the cost of
fixing the AMT
• Baby boom generation starts to retire 2008
• => soaring costs of social security and,
• Especially, Medicare
26
27
Appendix I: Origins of Current
Account deficits
• Trade deficits are not primarily determined
by trade policy (e.g., tariffs, NAFTA, WTO, etc.)
• Rather, by macroeconomics.
• Deficits are affected by exchange rates
and growth rates.
• But these are just the “intermediating
variables”
• More fundamentally, the US trade deficit
reflects a shortfall in National Saving
28
The decline in US National Saving
• National Saving ≡
how much private
saving is left over
after financing the budget deficit.
• US CA deficit widened rapidly in early
1980s, & more so 2001-06, because
of sharp falls in National Saving
29
National Savings, Investment &
Current Account, as shares of GDP
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
1967
1966
1965
1964
1963
1962
1961
0.0%
-2.0%
-4.0%
-6.0%
Net Natl Saving (% of GDP)
Net Domestic Investment (% of GDP)
Current Account (% of GDP)
30
Why did National Saving fall in
early 1980s, and 2001-05?
• The federal budget balance fell abruptly both
times
– From deficit = 2% of GDP in1970s, to 5% in 1983.
– From surplus = 2% GDP in 2000, to deficits >3% now.
• According to some theories, the pro-capitalist tax
cuts were supposed to result in higher
household saving.
• Both times, however, saving actually fell after the
tax cuts.
• U.S. household saving is now < 0 !
• So both components of US National Saving fell.
31
What gave rise to the record
federal budget deficits?
• Bush Administration: Large tax cuts, together
with rapid increases in government spending
• Parallels with Reagan & Johnson Administrations:
–
–
–
–
–
–
Big rise in defense spending
Rise in non-defense spending as well
Unwillingness of president to raise taxes to pay for it.
Leads to declining trade balance
Eventual decline in global role of the $.
They had ignored the advice of their CEA Chairmen.
32
33
Best precedent for fiscal expansion
that began in 2001?
• Reagan’s 1980s fiscal expansion is a good
precedent; it too came from a president raising
defense spending without being willing to pay for it.
– Weidenbaum quietly resigned over spending.
– Feldstein popularized “Twin deficits.”
• But 1967-72 Vietnam-era expansion fits even better:
– (1) Monetary policy was accommodating then, as recently.
– (2) The dollar’s international currency standing began a
trend decline in the 1970s, which the Iraq-era expansion
is now restarting.
34
Appendix II: Ten Reasons Why Bush
Budget Forecasts Are Too Optimistic
SPENDING
1. National security spending:
• Iraq cost still not fully counted in defense budget.
• Also, they want to build up the military to be able
to take on Iran & other countries.
• New weapons systems (won’t enhance security).
• Not to mention all the pork that is in the national
security budget.
35
2. Domestic discretionary spending
•
•
Government forecast assumes spending
rises only with inflation,
but in fact it started rising at ≈ 8 % /year
when Bush came to office, far higher than
under Clinton with caps & PAYGO
–
–
–
•
e.g., agricultural & energy subsidies
prescription drug benefit
manned space program...
Likely to continue [1]
[1] Non-partisan Concord Coalition: if spending were to stay constant as % of GDP, it
would add $1.1 trillion. (Or $1.3 trillion, including interest on the additional debt.)
36
2 quotes from economic advisors
to Reagan & McCain
– Bartlett (2005): “In light of Bush's bigspending ways, Bill Clinton now looks
almost like another Calvin Coolidge.”
– Hassett (2005): “spending growth under
George W. Bush has been almost four
times as high as it was during the same
period of Bill Clinton's presidency.”
37
3. Now that the congressional
Democrats are in the majority…
•
•
•
they may have some priorities of their
own to spend money on, like health &
education.
In the 1990s, they were persuaded by President
Clinton and the PAYGO rules to hold back, in order
to get a budget surplus, having passed the 1993
budget act without a single Republican vote.
Since Bush blew the surplus, and paid no price for it,
it may be more difficult to put together the same
Democratic support for budget discipline achieved in
the 1990s.
38
ECONOMIC FORECASTS
4. Some economic & technical
assumptions in CBO & OMB
forecasts have been overoptimistic,
• e.g., early growth forecast at 3.3% & high
labor share of income.
• Currently, if real interest rates rise to more
normal levels, debt service costs will rise
sharply.
39
TAX CUTS
5. White House proposes extending tax
cuts passed in 2001and 2003, and
6. permanently ending estate tax in 2010.
7. Had also proposed privatizing social
security and expanding IRAs/401(k)s;
all of which would have lost revenue esp.
outside the 5-year budget window.
8. Eliminate Alternative Minimum Tax
[1]
[1] Estimated cost $0.7 trillion .
40
ENTITLEMENTS
9. Social Security
[1]
10. Medicare
[1] Official forecasts count $2 1/2 trillion in payroll tax revenues that are in fact supposed to go to
Social Security; even that is far from enough to pay for promised benefits.
41
What about the “Starve the Beast” hypothesis
(“tax revenue↓ => spending↓”) ?
• History shows that the Starve the Beast claim
does not describe actual spending behavior.
• Spending is only cut under a regime of “shared
sacrifice” that simultaneously raises tax revenue
(the regime of caps & PAYGO in effect
throughout the 1990s)
• Spending is not cut under a tax-cutting regime
(1980s & current decade).
• See Figure 2.
42
US Federal Budget Deficit
and Spending as % of GDP.
Fig. 2:
7.0%
25.0%
6.0%
24.0%
5.0%
23.0%
4.0%
22.0%
3.0%
21.0%
2.0%
20.0%
1.0%
19.0%
0.0%
G.W. Bush
W.J. Clinton
R. Reagan
17.0%
J. Carter
18.0%
G.H.W. Bush
26.0%
-1.0%
-2.0%
Spending/GDP (left)
Budget Deficit/GDP (right)
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
-3.0%
1977
16.0%
43
Further, even if the Starve the Beast
hypothesis did describe actual behavior…
• It would contradict the original rationale for
the tax cuts: the Lafferite hypothesis that
“tax rate cuts produce more tax revenue.”
• “Starve the Beast” would then predict
more government spending not less.
• Is Laffer a straw man?
– President George W. Bush, July 24, 2003
– OMB Director Joshua Bolten, press conference July
2003; & WSJ, Dec. 10, 2003
– Treasury Secy.John Snow, Congr. testimony, Feb. 7,
2006: “Lower tax rates are good for the economy and
a growing economy is good for Treasury receipts.”
44
Appendix III:
Many economists have come up with
ingenious counter-arguments to the twin
deficit concerns.
• But I don’t buy them.
• I.e., the twin deficits that face us now and
in the future should indeed be a source
of concern
• Low US national saving is roughly a
“sufficient statistic” for the problem.
45
7 alternate views that purport to
challenge the “twin deficits” worry
•
•
•
•
•
•
•
The siblings are not twins
Alleged Investment boom
Low US private savings
Global savings glut
It’s a big world
Valuation effects will pay for it
China’s development strategy entails
accumulating unlimited $
46
Appendix IV:
Possible loss of US economic hegemony.
• US can no longer necessarily rely on the support
of foreign central banks, such as China.
• China may allow appreciation of RMB.
• Even if China keeps RMB undervalued, it can
diversify its currency basket out of $
– There now exists a credible rival for international
reserve currency, the € .
– Chinn & Frankel (2007): under certain scenarios, the
€ could pass the $ as leading international currency.
– US would lose, not just seignorage, but the exorbitant
privilege of playing “banker to the world “
47
€ could surpass $ as leading international
reserve currency by 2022 – Chinn & Frankel (2007)
1.0
USD
0.8
0.6
0.4
0.2
DEM
EUR
0.0
75 80 85 90 95 00 05 10 15 20 25 30 35 40 48
Possible loss of US political
hegemony.
• In the 1960s, foreign authorities supported $ in
part on geopolitical grounds.
• Germany & Japan offset the expenses of
stationing U.S. troops on bases there, so as to
save the US from balance of payments deficit.
• In 1991, Saudi Arabia, Kuwait, and others paid
for the financial cost of the war against Iraq.
• Repeatedly the Bank of Japan bought $ to
prevent it from depreciating (e.g., late 80s)
• Next time will foreign governments be as willing
to bail out the U.S.?
49
Historical precedent: £ (1914-1956)
• With a lag after US-UK reversal of ec. size & net
debt, $ passed £ as #1 international currency.
• “Imperial over-reach:” the British Empire’s
widening budget deficits and overly ambitious
military adventures in the Muslim world.
• Suez crisis of 1956 is often recalled as occasion
when US forced UK to abandon its remaining
pretensions to an independent foreign policy;
• Important role played by simultaneous run on £.
50
Appendix V: Estimating
the Implicit Weights
in the Chinese RMB Basket
(Frankel and Wei, 2007)
51
The new exchange rate regime
announced July 2005:
• Minor initial appreciation of 2.1% appreciation.
• RMB to be set with reference to a currency basket,
• allowing a movement of up to +/- .3% in bilateral
exchange rates within any given day
– (in theory, daily band could cumulate to 6.4% /mo.).
• Governor Zhou revealed 11 currencies (Aug. 2005),
• though numerical basket weights still unannounced.
52
The magnitude of daily movements
vs. $ increased in the spring of 2006,
-.002
0
.002
.004
Changes in CNY per USD over Time: 07/22/05-1/8/2007
01 Jul 05
01 Jan 06
01 Jul 06
date
01 Jan 07
53
Estimating the weights
• A problem made-to-order for OLS regression.
• Regress % changes in value of RMB against
% changes in values of candidate currencies.
• Δ log RMBt =
c + α Δlog $t + β1Δlog € t
+ β2 Δlog ¥t + …
• The coefficients are the basket weights.
• Can impose α + Σ β j = 1.
54
• If China is following a perfect basket peg,
the fit should be perfect, a rarity in
econometrics ( s.e.r. = 0, & R2 = 100%).
• More likely, the basket peg is not perfect,
but one can still estimate weights with fairly
tight standard errors.
• The real questions:
– How wide is the band?
– How strong is the trend term (c), and
– How great is the estimated weight on non-$
currencies?
55
In terms of what numeraire
is “value” defined?
• It doesn’t matter, if basket peg holds well.
• Previous authors have chosen:
the SDR, Swiss franc, dollar, purchasing power over a
consumer basket of domestic goods, a GDP-weighted
basket of major currencies, & Canadian dollar.
• We here use the SDR as numeraire,
& the price of gold as a robustness check.
56
References for the technique
• “Pioneered” by Frankel (1993), Frankel & Wei
(1994, 95).
• Used by others, including Benassy-Quere
(1999), Ohno (1999), Frankel, Schmukler &
Servén (2000), and Benassy-Quere, Coeure &
Mignon (2004).
• Applied to RMB by Shah, Zeileis, & Patnaik
(2005), Frankel & Wei (2006), Eichengreen
(2006) and Yamazaki (2006)
57
Implicit weights in RMB basket
Table 11
7/22/05-1/8/07
US Dollar
Euro
Japanese Yen
Korean Won
Singapore $
British Pound
Malaysia Ringgit
Russia Ruble
Australian Dollar
Thailand Baht
Canadian Dollar
Trend
Estimate
0.904**
-0.006
0.008
0.002
-0.018
-0.004
0.053**
-0.018
-0.003
0.006
0.003
.00009**
(standard error)
(0.021)
(0.014)
(0.006)
(0.009)
(0.021)
(0.011)
(0.015)
(0.021)
(0.008)
(0.010)
(0.008)
(.00003)
** significant at 5%;
Change in the log value of RMB (in terms of SDRs) is regressed
on changes in log values of other currencies.
58
Estimation in sub-periods
• 6 sub-periods:
– (1) July 22-Oct.31, 2005, (2) Nov.1, 05 – Jan.31, 2006, (3) Feb.1
– Apr. 28, 2006, (4) May 1- July 31, 2006, (5) Aug.1-Oct.31, 2006,
(6) Oct.1, 2006 – Jan.8, 2007.
– Tables 11 – 17 report results.
• In 1st 2 sub-samples, regime is a US $ peg.
– Weight on $ & R2 virtually 1.0. As tight as Hong Kong $ !
• After Jan.2006, however, $ weight falls.
– In Feb.-April, 2006, est. weight on $ only 0.7.
– Ringgit, won, ruble, & baht receive positive weights.
– Surprisingly, ¥ & € continue to receive no positive weight.
• Over last 8 months, $ weight ≈ .9
– Significant trend appreciation = .0002 / day => 5.2 % /yr.
59
Extensions
• Basic results robust with respect to:
– using another numeraire (gold price) Tbs.11A-17A
– constraining weights to sum to 1,
• Table 20
=> won estimate sharper
– Method of moments
• We allowed for accelerating trend, but
found no sign of it.
60
Evolution during the course of the
sample period
Downward trend in basket’s weight on $
• Highly significant if assumed linear - Table 18
– Trend in level still significant as well, but only .0001
appreciation/day, or 2.5 %/yr., against basket
• But we need to specify the time pattern of the
weights non-linearly, so they won’t go <0 or >1.
61
Full specification of weights w(j)
on currency values X(j)
• Δ log RMBt = f(t) + ∑ w(j) Δ X(j)t
• To impose the constraint ∑w(j) =1,
– Let € = 1st currency:
w(€) = 1- ∑w(j)
=>
• [ΔlogRMBt - Δlog€t ] = f(t) + ∑ w(j)(ΔX(j)t - Δlog€t)
– where 0<w(j)<1.
• Now let the weights w(j) depend on time, using
exponential form.
• Specification 2 :
let w(j) = b0(j) + b1(j)* [1- exp(-d t)],
and f(t) = c0 + c1* t .
62
Estimation of nonlinear evolution of weights
7/22/05-1/8/07 in Table 22
• Confirms
– in 2005, $ weight = .98 ≈ 1.
– significant downward trend in $ weight
– Of non-$ currencies, upward trend in the ringgit
weight is the strongest statistically.
• Strikingly, no more statistical significance to
the trend of appreciation against the basket,
– let alone to acceleration in that trend.
– Rather, action comes from falling weight on $.
63
But the estimated shift away from $ is painfully slow:
starting at .98 in 2005, $ weight falls only to .87 over 5 yrs.
Weight on the dollar
1
0.98
0.96
0.94
0.92
0.9
0.88
0.86
0.84
0.82
month-year
10
720
10
120
09
720
09
120
08
720
08
120
07
720
07
120
06
720
06
120
720
05
0.8
64
We also looked at intra-daily movements
• Some evidence that intra-daily pattern
differs from inter-daily pattern, itself
consistent with declared regime.
• On purely intra-daily data, there is less
sign of a downward trend in the very high
weight on the dollar.
65
Has US pressure pushed the pace
of increased flexibility?
• We searched an electronic database of news
reports (FACTIVA/NewsPlus) , recording the number of
US news reports of US officials asking China to
speed up RMB flexibility/revaluation.
• Two separate time series on the cumulative
numbers of complaints
– from US Treasury and
– from officials of other government agencies (e.g. the
White House, Congress and Fed)
66
Complaints: Treasury & other US
0
5
10
15
20
Time plots of cumulative US Treasury and Non-Treasury Complaints
01 Jul 05
01 Jan 06
01 Jul 06
01 Jan 07
date
cumulative non-treasury report
cumulative treasury report
67
We added # complaints as a regressor
There is evidence that cumulative
complaints are associated with a reduction
in the RMB’s weight on the US dollar.
68