You are here: Home Knowledge Base Polity Avoiding Currency Wars and Ensuring Balanced Global Recovery
Symposium 2011

Avoiding Currency Wars and Ensuring Balanced Global Recovery

The Challenge

When recessions are severe and global, like the one triggered by the global financial crisis, they tend to lead to competitive devaluations of currencies. Such interventions raise unnecessary trade tensions, especially if accompanied by protectionist measures. The result could be a large disruption of global trade and further worsening of the global recession.

As the experience of the Great Depression clearly shows, the consequences of currency and trade wars would be felt by businesses, consumers and governments around the world.

What is needed is a coordinated plan of action, involving all trading partners, to ensure a balanced global recovery. The plan must address three interconnected issues: the exchange rate system, global imbalances and excessive reserve accumulation.

First, is there room for coordinated policy interventions that ensure a balanced global recovery, thereby avoiding competitive devaluations?
Second, to what extent is a global recession linked to global trade imbalances and to differences in exchange rate regimes? What roles can international institutions, primarily the International Monetary Fund, play in monitoring global imbalances?

Third, are there means to reduce the massive accumulation of foreign reserves, especially by countries with pegged exchange rates, which have accompanied global imbalances? What is the scope for using capital control measures as substitutes for foreign reserve accumulation? Is exchange rate stabilization necessarily better for business or can firms cope with exchange rate risks on their own?

    Solutions

    Solution
    Symposium 2011

    Globalize the role of “lender of last resort” by establishing a global swap facility to deal with global liquidity shortages.

    Globalize the role of “lender of last resort” by establishing a global swap facility to deal with global liquidity shortages.

    Globalize the role of “lender of last resort” by establishing a global swap facility to deal with global liquidity shortages.

    Polity, Civil Society
    Solution
    Symposium 2011

    Avoid “blame-thy-neighbor” rhetoric.

    Avoid “blame-thy-neighbor” rhetoric.

    Avoid “blame-thy-neighbor” rhetoric.

    Polity
    Solution
    Symposium 2011

    Policy-makers should deal with the underlying causes of economic problems.

    Policy-makers should deal with the underlying causes of economic problems.

    Policy-makers should deal with the underlying causes of economic problems.

    Polity
    Solution
    Symposium 2011

    The IMF should represent emerging countries better, pointing out coordination gains from global adjustments (supported by analysis) and advocating them.

    The IMF should represent emerging countries better, pointing out coordination gains from global adjustments (supported by analysis) and advocating them.

    The IMF should represent emerging countries better, pointing out coordination gains from global adjustments (supported by analysis) and advocating them.

    Polity, Civil Society

    Proposals

    Proposal
    Symposium 2011

    A new ECB president and a seminal G20 summit

    According to the Berkeley economist Barry Eichengreen, a new global monetary order is emerging. See Eichengreen’s recent book, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of ...

    According to the Berkeley economist Barry Eichengreen, a new global monetary order is emerging. See Eichengreen’s recent book, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (Oxford University Press, 2011). Yet the summer of 2011 will be remembered for monetary calamities both in the United States and in Europe, not for the smooth transition to a new international monetary system. The next meeting of the G20 will take place on November 3–4 in Cannes. Reform of the international monetary system is high on the agenda of that G20 summit. The

    Polity, Civil Society
    Proposal
    Symposium 2011

    The Appropriate Policy Mix for China

    To achieve strong, sustainable, and balanced growth, an organization such as the IMF could identify sources of global imbalances and recommend coordinated measures (both by surplus and deficit countri ...

    To achieve strong, sustainable, and balanced growth, an organization such as the IMF could identify sources of global imbalances and recommend coordinated measures (both by surplus and deficit countries) to reverse the imbalances. One problem, though, is that large countries such as the US and China often ignore the IMF’s advice and act in what they perceive to be their own self interest. Thus, attempts at multilateral consultation should be supplemented by a clear exposition of how the recommended changes are in the country’s own interest. In the case of China, it is important to highlight that continued exchange rate

    Polity, Civil Society
    Proposal
    Symposium 2011

    Start solving the imbalances and debt problems in Europe and then discuss similar global solutions within the G-20

    It is most unlikely that the World will find solutions to the global trade imbalances and avoid currency and trade wars if the Eurozone, that has completely liberalized intra regional trade and adopte ...

    It is most unlikely that the World will find solutions to the global trade imbalances and avoid currency and trade wars if the Eurozone, that has completely liberalized intra regional trade and adopted a common currency, does not find a solution for the intra-European imbalances that brought about the current financial crisis in Europe. Here there is a proposed solution for Europe: Authorize the EFSF to issue three trenches of Euro Bonds guaranteed by all the AZ countries: The first trench should be sufficient to retire all the debt of the European Nations that are insolvent through swaps that

    Polity
    Proposal
    Symposium 2011

    Avoiding Currency Wars and Ensuring Balanced Global Recovery

    Take coordinated fiscal policy measures, rather than currency intervention, to support domestic demand, and thereby global demand, in the short run. This option is feasible as long as countries enter ...

    Take coordinated fiscal policy measures, rather than currency intervention, to support domestic demand, and thereby global demand, in the short run. This option is feasible as long as countries enter the recession with a sustainable fiscal position and therefore have some fiscal space to act. Give a mandate to an international institution (primarily the IMF) to identify sources of global imbalances that may accompany a global recession and recommend coordinated measures (both by surplus and deficit countries) to reverse the imbalances. While this would involve gradual exchange rate adjustments for countries with pegged currencies, countries with flexible exchange rates would

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2011

    Reform International Liquidity

    The 2007-09 crisis taught us that even rich countries might need lender of last resort assistance in foreign currencies. These have been supplied by a network of central bank swap lines initiated by t ...

    The 2007-09 crisis taught us that even rich countries might need lender of last resort assistance in foreign currencies. These have been supplied by a network of central bank swap lines initiated by the U.S. Federal Reserve, which still maintains a program in case European funding markets freeze up due to sovereign default fears. Emerging markets have addressed liquidity needs through massive foreign exchange reserve accumulation, but aside from the costs to the countries themselves, there are significant systemic costs -- negative externalities for other countries and the world financial system. One problem. but only one, is the potential for

    Polity, Civil Society
    Proposal
    Symposium 2011

    Coordination and the Problem of Currency Wars

    During the Great Depression and afterward, economists lamented the problem of competitive depreciation. Now we see countries, especially those in the developing world, engaging in competitive nonappre ...

    During the Great Depression and afterward, economists lamented the problem of competitive depreciation. Now we see countries, especially those in the developing world, engaging in competitive nonappreciation. Whereas, in retrospect, competitive depreciation had advantages in the context of the 1930s -- it raised prices in a deflationary environment -- the process is counterproductive for emerging countries now, because it fuels inflation and asset bubbles. If China appreciated more against the dollar, for example, Brazil could too with a smaller loss in competitiveness, and Brazil's move, in turn, would reduce China's loss. Both countries could more effectively fight inflation. The solution

    Polity, Academia, Civil Society