Post on 15-Jun-2020
1
Globalization and crises
Luis Servén
The World Bank
Kuala Lumpur, November 2016
Kuala Lumpur November 2016 -- Luis Servén
2
Plan
Stylized facts
1. Financial globalization
2. Currency crises
3. Bubbles
4. Sovereign debt and default
5. Financial crises, propagation and policy responses
Kuala Lumpur November 2016 -- Luis Servén
3
Some stylized facts
Fact 1: Big increase in the degree of international
financial integration since 1990
Kuala Lumpur November 2016 -- Luis Servén
4
How is the growth of financial integration
measured?
De jure: Widespread removal of barriers to international
financial transactions.
De facto: Massive growth in cross-border asset
holdings.
[Some hybrid measures sometimes used as well; see
Quinn, Schindler and Toyoda 2011 for full details]
Kuala Lumpur November 2016 -- Luis Servén
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Leading de jure measures (all based on IMF AREAER):
• Chinn and Ito (2007) KAOPEN: first principal component of
individual 0/1 restriction indicators from AREAR table
• Underlying indicators are dichotomous (yes/no), hence rough
• Quinn (1997, updated) index of restrictions on financial
transactions – based on coding of text of AREAER; separates
current and capital account.
• Schindler (2009) KA index – more finely-graded version of Quinn
w/ details by asset transaction type.
• Fernández et al (2015): update and extension of Schindler to 10
asset categories, adding 4 new ones
• Derivatives, comercial credit, financial guarantees, real estate
Kuala Lumpur November 2016 -- Luis Servén
Quinn index of capital account liberalization, by income group
Source: Reinhardt et al (2013) Kuala Lumpur November 2016 -- Luis Servén
0.2
.4.6
.81
0.2
.4.6
.81
1970 1980 1990 2000 2010
All
Advanced
Emerging
Developing
Ind
ex
Year
Chinn-Ito index of financial openness
(group averages)
0.2
.4.6
.81
0.2
.4.6
.81
1970 1980 1990 2000 2010
World
Advanced
Emerging
Developing
Ind
ex
Year
Chinn-Ito index of financial openness
(group averages)
Source: Milesi-Ferretti and Tille (2011) Kuala Lumpur November 2016 -- Luis Servén
.15
.2.2
5
.3.4
.5.6
.7
1995 2000 2005 2010 2015
World HI (rhs) UMI
LMI LIC
Ind
ex
Year
Fernandez et al (2015) index of capital controls
Controls on inflows(averages across 10 assets categories)
.1.1
5.2
.25
.3.4
.5.6
.7.8
1995 2000 2005 2010 2015
World HI (rhs) UMI
LMI LIC
Ind
ex
Year
Fernandez et al (2015) index of capital controls
Controls on outflows(averages across 10 assets categories)
12Kuala Lumpur November 2016 -- Luis Servén
13
The various de jure measures are fairly highly correlated
Kuala Lumpur November 2016 -- Luis Servén
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De facto: Massive increase in cross-border asset holdings
• speeds up after 1990
• especially large in advanced countries
• slows down after the global crisis (“deglobalization”)
Most popular summary statistic: the sum of gross foreign
assets and liabilities relative to GDP.
Kuala Lumpur November 2016 -- Luis Servén
Source: Gourinchas and Rey (2013)
Kuala Lumpur November 2016 -- Luis Servén
External Assets and Liabilities (percent of GDP)
16 CEMFI September 2016 -- (c) Luis Servén
010
020
030
040
0
0
10
020
030
040
0
1970 1980 1990 2000 2010
Assets
Liabilities
A + L
% o
f G
DP
Year
World
External Assets and Liabilities (percent of GDP)
17 CEMFI September 2016 -- (c) Luis Servén
010
020
030
040
050
0
0
10
020
030
040
050
0
1970 1980 1990 2000 2010
Assets
Liabilities
A + L
% o
f G
DP
Year
OECD
050
10
015
020
0
050
10
015
020
0
1970 1980 1990 2000 2010
Assets
Liabilities
A + L
% o
f G
DP
Year
Rest of the World
External Assets and Liabilities (percent of GDP)
Kuala Lumpur November 2016 -- Luis Servén
050
10
015
020
025
030
035
0
050
10
015
020
025
030
035
0
1970 1980 1990 2000 2010
Assets
Liabilities
A + L
% o
f G
DP
Year
USA
020
40
60
80
10
012
0
020
40
60
80
10
012
0
1970 1980 1990 2000 2010
Assets
Liabilities
A + L
% o
f G
DP
Year
China
External Assets and Liabilities (percent of GDP)
19 CEMFI September 2016 -- (c) Luis Servén
020
040
060
080
0
0
20
040
060
080
0
1970 1980 1990 2000 2010
Assets
Liabilities
A + L
% o
f G
DP
Year
Eurozone
Kuala Lumpur November 2016 -- Luis Servén
Source: Prasad (2012)Kuala Lumpur November 2016 -- Luis Servén
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Fact 2: the composition of assets and liabilities
differs systematically across advanced and
developing countries.
Kuala Lumpur November 2016 -- Luis Servén
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In particular: advanced economies tend to be long in
risky assets, other economies short.
Rich countries hold equity assets, developing countries
hold reserves.
And the difference in portfolio composition between
both groups of countries has widened over time
Kuala Lumpur November 2016 -- Luis Servén
Kuala Lumpur November 2016 -- Luis Servén
Source: Prasad (2012)Kuala Lumpur November 2016 -- Luis Servén
Source: Prasad (2012) Kuala Lumpur November 2016 -- Luis Servén
Source: Prasad (2012)Kuala Lumpur November 2016 -- Luis Servén
These changes in the structure of countries’ portfolios reflect
the shifting composition of capital inflows and outflows
since 1990
• FDI dominates inflows to emerging markets.
• Inflows to advanced countries are dominated by
portfolio capital and banking flows.
• Emerging-country outflows have expanded greatly –
especially in middle-income countries – and they are
dominated by reserve accumulation.
• In contrast, reserves play a minimal role in advanced-
country outflows.
Kuala Lumpur November 2016 -- Luis Servén
Source: EIU
Emerging economies hold the bulk of international reserves
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,0001
98
0
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
USA EU-15 Japan Emerging Asia China Oil Exporters LAC-6
International reserves around the world (US $ bn)
Kuala Lumpur November 2016 -- Luis Servén
Why the massive reserve accumulation by emerging
markets?
Reserves as a hedge against external volatility (such
as sudden stops) – a strategy validated by the crisis,
so likely to persist
‘New mercantilism’: defend exchange rate targets
to support an export-oriented growth strategy (e.g.,
China and some East Asian countries)
Adjustment lags to terms-of-trade windfalls
(commodities)
Kuala Lumpur November 2016 -- Luis Servén
Fact 3. Valuation effects – capital gains and losses on
gross foreign assets and liabilities – account for an
increasingly large part of the dynamics of countries’ net
foreign asset positions
Kuala Lumpur November 2016 -- Luis Servén
Large, heterogeneous gross asset positions create a big
exposure to changes in asset prices and/or exchange
rates
The U.S. has consistently enjoyed very large valuation
gains.
Kuala Lumpur November 2016 -- Luis Servén
Source: Gourinchas and Rey (2013)Kuala Lumpur November 2016 -- Luis Servén
Source: Gourinchas and Rey (2013)Kuala Lumpur November 2016 -- Luis Servén
In most countries, the variance of the valuation effect is
about as big (about 90% on average) as the variance of the
change in net foreign assets.
The correlation between the current account and the
change in the net foreign asset position is fairly low
If changes in net asset positions are increasingly driven
by valuation effects, and net flows are dwarfed by gross
flows – does the current account still matter?
Kuala Lumpur November 2016 -- Luis Servén
Fact 4. Capital flows (and also the prices of risky
assets) show a high degree of synchronization around
the world
Kuala Lumpur November 2016 -- Luis Servén
Kuala Lumpur November 2016 -- Luis ServénSource: Rey (2013)
Kuala Lumpur November 2016 -- Luis ServénSource: Barrot and Servén (2016)
Table 2 Average cross-regional correlations, 1979-2013
(a) Gross capital inflows by foreign agents (CIF)
(b) Gross capital outflows by domestic agents (COD)
North
America
Latin America
and Caribbean
Asia and
PacificEurope
Middle East
and North
Africa
Sub-
Saharan
Africa
North America 0.047
Latin America and Caribbean 0.129 0.083
Asia and Pacific 0.127 0.090 0.062
Europe 0.251 0.003 -0.003 0.247
Middle East and North Africa 0.148 0.109 0.124 0.153 0.077
Sub-Saharan Africa 0.057 0.142 0.074 -0.099 0.021 0.082
North
America
Latin America
and Caribbean
Asia and
PacificEurope
Middle East
and North
Africa
Sub-
Saharan
Africa
North America 0.102
Latin America and Caribbean 0.238 0.088
Asia and Pacific 0.236 0.167 0.078
Europe 0.401 0.234 0.218 0.242
Middle East and North Africa 0.247 0.152 0.111 0.283 0.089
Sub-Saharan Africa 0.132 0.106 0.074 0.154 0.093 0.014
Kuala Lumpur November 2016 -- Luis ServénSource: Barrot and Servén (2016)
Table 2 Average cross-regional correlations, 1979-2013
(a) Gross capital inflows by foreign agents (CIF)
(b) Gross capital outflows by domestic agents (COD)
Advanced Emerging Developing
Advanced 0.170
Emerging 0.128 0.090
Developing -0.060 0.098 0.061
Advanced Emerging Developing
Advanced 0.216
Emerging 0.276 0.091
Developing 0.159 0.130 0.033
Common factors (global and/or regional) account for a
major share of the observed variation in asset prices and
flows around the world.
• A ‘global financial cycle’ – asset returns move in
unison across countries.
• Strong international propagation of financial
disturbances and market turbulence
Kuala Lumpur November 2016 -- Luis Servén
Mundell’s ‘trilemma’: a country cannot have all three of
• An independent monetary policy
• A nominal exchange rate objective
• An open capital account
The global financial cycle reduces it to a dilemma:
exchange rate flexibility does not grant monetary
independence
Kuala Lumpur November 2016 -- Luis Servén
Fact 5. Large global imbalances (big current account
gaps of opposing sign) opened up over the globalization
era – and grew bigger up to the global crisis.
CEMFI September 2013 -- (c) Luis Servén43
Global imbalances(1980-2014)
Kuala Lumpur November 2016 -- Luis Servén
Global imbalances are not a new phenomenon – they were
already seen in the 1980s, for example.
But in the recent episode the magnitude was much larger.
And there were new roles:
• Industrial countries (especially the U.S.) ran the
biggest deficits
• Emerging countries (especially China) supplied
most of the financing
CEMFI September 2013 -- (c) Luis Servén45
Imbalances have narrowed post-crisis
• The U.S. has scaled back its deficit – with the
unwinding of the fiscal stimulus
• China’s surplus has declined
But they still remain large
• The U.S. still shows the biggest deficit (>0.5% of
world GDP)
• Germany’s surplus (about 0.4% of world GDP) now
exceeds that of China
CEMFI September 2013 -- (c) Luis Servén46
Are global imbalances a concern for world economic
stability?
• Did they cause the global crisis?
• Risk of a ‘sudden stop’ on high deficit countries
• Not the experience of the U.S. in the global crisis!
No Risk of a ‘sudden stop’ on high deficit countries
CEMFI September 2013 -- (c) Luis Servén47
Large imbalances might pose a (global) risk due to
externalities / spillovers:
– A sudden stop on a large deficit country (the U.S?) could
propagate to the rest of the world.
But the opposite happened during the crisis – ‘flight to safety’
– Big surpluses in large countries detract from global demand – and
augment the deflationary effect of adjustment by deficit countries
near the Zero Lower Bound
CEMFI September 2013 -- (c) Luis
Servén48
Fact 6. The incidence of crises tends to be higher in
times of higher international capital mobility
Kuala Lumpur November 2016 -- Luis Servén
Different varieties of crises:
Sovereign default
Exchange rate crashes
Financial / banking crises
Inflation explosions
Often occur in combination; sometimes all at once.
Crises do not happen at random times – they typically follow
booms in credit, asset prices, and/or capital flows
Kuala Lumpur November 2016 -- Luis Servén
Kuala Lumpur November 2016 -- Luis Servén
Capital mobility is historically associated with the incidence
of banking crises.
Kuala Lumpur November 2016 -- Luis Servén
Source: Reinhart and Reinhart (2008)Kuala Lumpur November 2016 -- Luis Servén
Defaults following capital flow surges
Kuala Lumpur November 2016 -- Luis Servén
0
5
10
15
20
25
1824 1834 1843 1852 1865 1873 1890 1897 1914 1929 1938 1979 1991 2011
Per
cen
t
Peak 1-2 years later Size of boom
Share of new defaults at
peak capital inflows (stripe)
Share of defaults
1-2 years post-peak (pale)
Magnitude of capital
inflow boom (dark)
Source: Reinhart, Reinhart and Trebesch (2016)
However…
…not all capital flow booms (or broader financial
booms) end up badly – just some do
The question is how to identify ‘bad booms’
• Scale? Persistence? Other features?
• And what are other contributing factors?
Kuala Lumpur November 2016 -- Luis Servén
An aside: can we really trust the data on countries’
foreign assets and liabilities?
Measures of global liabilities from conventional sources
(e.g., IMF, Lane-Milesi) exceed those of global assets
– the world is a net debtor.
Measures of global investment income show that reported
payments exceed reported receipts every year.
This points to significant amounts of unrecorded assets
and unreported asset income.
The ‘missing wealth of nations’: mainly assets held by
households in tax havens (Zucman 2013) .
Kuala Lumpur November 2016 -- Luis Servén
International investment statistics are based on the
‘residence principle’: what matters is the residence of
creditor and debtor, no the location of the custodian.
Custodians located in tax havens cause a blind spot – e.g.,
U.S. securities entrusted by a French creditor to a
Swiss bank show up in the U.S. IIP but not France’s.
One way to overcome this would be to use data reported
by the custodian country on the residence of offshore
asset holders.
Switzerland does this since 1998; no other tax haven does.
It also reports the nationality of bank deposit holders.
Kuala Lumpur November 2016 -- Luis Servén
In other advanced countries, most foreign securities held
at custodian institutions are owned by residents
Source: Zucman (2013)Kuala Lumpur November 2016 -- Luis Servén
The large share of bank deposits attributed to tax havens reflects the
use of sham corporations to hide the true beneficial owners.
Most deposits likely belong to EU residents in reality – there is a clear
negative correlation those from tax havens (particularly at the
time of the 2005 Savings Directive).
Kuala Lumpur November 2016 -- Luis Servén
To estimate global hidden assets, compute the difference
between global recorded liabilities and recorded
assets. It is positive every year.
Kuala Lumpur November 2016 -- Luis Servén
The discrepancy is larger for equity assets than for bonds
Source: Zucman (2013)Kuala Lumpur November 2016 -- Luis Servén
Source: Zucman (2013)
Overall, the hidden assets amount to 5-6 percent ($6 trn) of households’
global financial wealth – double the total net debt of rich countries.
Kuala Lumpur November 2016 -- Luis Servén
The ownership of tax haven wealth is unknown, but likely
overall hidden wealth likely makes the rich world a
net creditor (as long as it owns at least 50% of all
hidden wealth).
In reality, the EZ is very likely a (major) net creditor,
while the U.S. is a (modest) net debtor
Net asset position (% GDP) under alternative scenarios, 2001-2008 average
Eurozone U.S.
Source: Zucman (2013)Kuala Lumpur November 2016 -- Luis Servén