Discussion of:Crises and International Policy CoordinationSizing Official Reserves

Gian Maria Milesi-FerrettiIMF, Research Department and CEPR

Crises and International Policy Coordination Causes of financial turbulence Global imbalances Yen carry trade Traditional policy coordination? Role of coordination in supervision?

A few general points

Global Imbalances Agree that they are not the direct driver of current

financial turbulence Direct impact: portfolio shock (decline in demand

for US assets--securitized debt) Together with decline in ST interest rates, big

decline in USD Sizable correction of CA balance underway

Global Imbalances (continued)

Importance of valuation changes

US has liabilities in domestic currency, assets in FX Large USD depreciation, underperformance of US

stocks imply that… US position at end-2007 broadly similar to external

position at end-2001

The yen “mystery”

Broadly agree with analysis Carry trade very profitable when implied FX

volatility is very low (as it was for many years) Not just Japanese residents investing

overseas…. …but also foreign investors limting non-equity

exposure (ie, reserves) As MP “normalizes”, reasonable pattern of

portfolio diversification should resume

Policy coordination

What appetite for it? Importance of perceptions of past episodes

(particularly in Asia) Criticism of Multilateral Consultations

overstated (not a standard G-7 communiqué) Key measures in countries’ best interest

Supervision and coordination

Agree that coordination of supervision key No illusions on what can be achieved with

regulation Securitization and risk—the (presumed)

advantage of securitization and much financial innovation was shifting risk to those better able to bear it

Emerging markets

Stronger net external position

Reduced FX exposure

Only “traditional” EM region: emerging Europe (growth, CA deficits). Importance for euro area performance for vulnerabilities

Net foreign asset position, emerging markets (ratio of GDP)

-80%

-60%

-40%

-20%

0%

20%

40%

60%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Middle East

Asia

Latin America

Emerging Europe

Discussion of “Sizing official reserves” Dramatic increase in stock of FX reserves in many

EMs

Change in the composition of K-inflows to EMs – increase in portfolio equity flows (and FDI)

Validity of traditional indicators of reserve coverage: changing nature of vulnerabilities/risks?

Increasing stock of reserves….

Foreign exchange reserves(ratio of GDP)

0%

5%

10%

15%

20%

25%

30%

35%

40%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Middle East

Asia

Latin America

Emerging Europe

Advanced economies

Falling external debt…..

External debt, emerging markets(share of GDP)

0%

10%

20%

30%

40%

50%

60%

70%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Middle East

Asia

Latin America

Emerging Europe

Equitization?

Portfolio equity liabilities (ratio of GDP)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Middle East

Asia

Latin America

Emerging Europe

Advanced economies

Role of FDI…

FDI liabilities (ratio of GDP)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Middle East

Asia

Latin America

Emerging Europe

Some general points on reserve coverage Openness up significantly…but a lot of trade

is in intermediates (inputs for re-export) Comparing FX to (total liab – FDI) is extreme

It may require EMs to be creditors (there are increasing “private” holdings of foreign assets)

Currency risk characteristics of portfolio equity very different from ST for. curr. debt

Reserves increasing, but foreign assets of EMs take other forms as wellForeign exchange reserves

(ratio of total external assets)

0%

5%

10%

15%

20%

25%

30%

35%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Emerging Markets

Advanced