REMARKS BY MR. JAVIER GUZMÁN CALAFELL, DEPUTY GOVERNOR AT THE
BANCO DE MÉXICO, ON "EMERGING ECONOMIES IN A NEW GLOBAL CYCLE:
CENTRAL BANK PERSPECTIVES", AT THE 9TH ANNUAL CONFERENCE
ORGANIZED BY THE CENTRAL RESERVE BANK OF PERU AND THE
REINVENTING BRETTON WOODS COMMITTEE "NEW CHALLENGES FOR
GLOBAL ECONOMIC INTEGRATION". Cusco, Peru, July 24, 2017.1
I thank the Banco Central de Reserva del Perú and the Reinventing Bretton
Woods Committee for the invitation to participate in this event.
After having reached a post-crisis low in 2016, global economic activity seems
to be transitioning to a faster, although still moderate, growth trajectory
starting this year. The recovery is supported by the upturn in global
merchandise trade, notably in capital goods, and an improved dynamism in
the industrial sector, especially in manufacturing. The improved economic
situation in the advanced economies is particularly noteworthy. Naturally, this
has enhanced confidence in the global economic outlook and reduced the
perception of risks deriving from tail scenarios, although these cannot be
completely ruled out.
Notwithstanding these positive developments, the world economy seems to
have lost part of the long-term dynamism displayed in the past, as global GDP
growth during 2017-2022 is forecast to be, on average, almost one percentage
point lower than in the pre-crisis years of 2000-2007. Furthermore, the current
juncture continues to be characterized by a number of important risks.
To start with, the future evolution of the global economy faces a high level of
uncertainty related to the lack of clarity and details about the direction to be
taken by economic policy in the United States, particularly on the fiscal,
regulatory and trade fronts.
Second, the recent strengthening of a widespread sentiment against
globalization, along with the political support it has been able to garner,
certainly threatens to stall, and in some instances even reverse, the progress
towards the economic and financial integration of the global economy
achieved over the last decades.
Third, as the ongoing recovery continues, it is natural to expect that the
normalization of monetary policy in advanced economies will begin to
generalize. While this should in principle be considered as a positive
development, it is not free of risks, as it implies a tightening of financial
conditions for emerging market economies (EMEs) and a major policy shift
with potential adverse global implications.
Fourth, the generally benign behavior that international financial markets
have displayed in recent months could swiftly be disrupted by a number of
factors. The latter include a reassessment of the economic outlook by global
investors as a result of policy surprises, economic difficulties in key emerging
market economies and geopolitical conflicts, among others.
Finally, we should bear in mind that the medium- to long-term outlook for
potential growth in both advanced and emerging economies may deteriorate
due to persistently weak trends in productivity, demography and the available
stock of capital.
What should be done to allow EMEs to thrive in such a complex external
environment?
I wish to stress that the main responsibility lies in EMEs themselves. The
consequent recommendations in terms of macroeconomic and financial
stability and structural reform are well known. In this respect, I would only like
to note that notwithstanding the important progress achieved during the last
years, major efforts are still needed, as we continue to see high fiscal and
current account imbalances, as well as excessive debt levels, in many of these
economies. In addition, structural reform policies in EMEs stagnated or even
reversed in recent years, with only a few of them announcing comprehensive
reform plans.
However, as important as these efforts may be, it is undeniable that the
magnitude of the challenges faced calls for increased cooperation of the
international community. It is in this area, and especially in the topic of
international monetary cooperation, where I would like to focus my remarks.
International policy cooperation faces many challenges. As history has shown,
policy cooperation at the international level is particularly strong during
episodes of crisis and severe economic and financial distress. Indeed, outside
such episodes, the case for cooperation tends to fade, as its benefits become
less evident and policymaking therefore has even stronger incentives to favor
national over multilateral considerations.
Moreover, the usefulness and feasibility of international policy cooperation is
a subject of debate. At one level, some argue that under floating exchange
rates countries are effectively isolated from external shocks and policy choices,
and thus free to set a monetary policy stance appropriate for their own
economies, rendering international cooperation unnecessary.2 Even for some
of those who challenge the isolating properties of floating exchange rates,
potential conflicts with the domestic mandates of central banks can make
international monetary cooperation difficult to attain.3
In my view, the merits of international cooperation outweigh by far its
potential disadvantages. In fact, the global financial crisis provides
unquestionable evidence in this respect, since its costs would have been much
higher in the absence of cooperation. But more generally, I would underline
the following:
• From a theoretical point of view, the existence of spillovers implies the
presence of externalities. If not taken into account properly, i.e.
internalized, the latter will imply inefficient results. In other words,
policy cooperation is needed. This applies even under flexible exchange
rates, since they do not fully insulate countries from external shocks.
•
The close linkages and interconnections currently existing in a highly
interdependent global economy set the stage for a spillover-rich
environment, as shocks and policy choices in one country or region are
easily transmitted to the rest of the world.4 Naturally, the potential
implications for worldwide output, inflation and financial stability from
policy choices in systemically important economies are especially
relevant.
• The analysis of the nature, magnitude and direction of spillovers from
monetary policy can be further complicated by the use of
unconventional monetary policy measures. For instance, according to
recent studies,5 the implementation of such policies by the US Federal
Reserve has had a greater impact on economic and financial variables of
EMEs than in the US economy itself. Additional challenges relate to
potential spillovers from prolonged use and subsequent exit from these
measures.
•
External shocks resulting from spillover effects will normally be
absorbed to a significant extent through exchange rate adjustments in
those countries with flexible rate regimes. The empirical evidence shows
that after a certain threshold the depreciation of a currency can have
non-linear effects on inflation and other macroeconomic variables.6
•
A situation of uncertainty, like the one we face today, enhances the case
for policy cooperation, since by increasing volatility it is equivalent to an
additional spillover effect.
Which are the possible areas for enhanced international monetary
cooperation?
Paradoxically, there are actions at the national level in advanced economies
that can be seen as a way of international cooperation in view of their potential
global repercussions.
The first one relates to communication. As I noted above, in the current
setting, a latent source of spillovers derives from a still-substantial degree of
uncertainty regarding the future course of monetary policy in advanced
economies. In particular, market anxiety revolves around the timing and path
for exit from the unconventional measures, and the overall normalization of
the monetary policy stance in those economies. In order to contain the risks
to macroeconomic and financial stability that may ensue, a clear and effective
communication strategy takes center stage. Although significant progress has
been made in this regard in recent years, in large part as a result of the
experience with the "taper tantrum" episode of mid-2013, the
misunderstandings that we have continued to see regarding possible
monetary policy actions in some advanced economies are a reminder of the
extreme market sensitivity to their central banks' remarks.
The second one has to do with the policy mix in advanced economies. It is well
known that the policy response in these countries to the global financial crisis
has relied excessively on monetary policy, without adequate support from
fiscal and especially structural adjustment measures. In the absence of
alternative sources of support for economic activity from either the demand
or the supply sides, interest rates have been lower than we would have seen
under a more balanced policy mix, thereby giving rise to stronger international
spillovers.
But beyond these actions at the national level, many possible options exist to
enhance policy cooperation from a strictly international point of view. Some
of them can be implemented relatively easily. In other cases, however, a strong
political will and an awareness of the self-interest deriving from international
cooperation would be required. Let me give you a few examples:
• Advanced economies need to be fully aware of the international
repercussions of their monetary policy actions. Failure to recognize the
extent and magnitude of the associated spillovers certainly exacerbates
the difficulties that the economies abroad, particularly emerging
markets, may face.7 This also complicates life for advanced economies,
since spillovers can certainly have a boomerang effect. Although some
progress has been made in this regard, this is still far from satisfactory.
Advanced economies should regularly carry out deeper evaluations of
the cross-border and boomerang repercussions of their policy choices,
particularly as the tightening of global financial conditions resulting
from the eventual exit from ultra-accommodative monetary policy
stances may pose serious threats to emerging market economies and
affect advanced economies themselves.
• Closely linked to the above, we need more research on monetary policy
spillovers and spillbacks from different sources. It is widely agreed that
our understanding of this issue is relatively modest. However, efforts to
overcome this situation are still insufficient.8 I am of the view that this
is a task that should be undertaken by multiple parties, including
international institutions, advanced economies, EMEs and academia.
The input of many sources of research is particularly important given the
potential for contradictory conclusions from the studies carried out by
official sources from the involved countries.
•
We need a strong, efficient and adequately funded global financial
safety net. Although it can be argued that the latter has already
strengthened due to individual country efforts, particularly in the
emerging markets, to accumulate international reserves, relying
exclusively on this strategy would be costly, inefficient and potentially
distortionary.9 A more balanced approach towards the enhancement of
the global financial safety net should consider a number of additional
actions. First, the International Monetary Fund must consolidate its
position as the central element of the global financial safety net,
through the increased availability of own resources, which it should be
better able to mobilize via more and improved lending facilities for its
membership. Secondly, as demonstrated by the experience during the
early stages of the global financial crisis, world liquidity provision may
be efficiently expedited by the availability of bilateral swap lines
between central banks.10 Lastly, more work should be done to enhance
the role of regional financial arrangements (RFAs), including through
better coordination with the IMF.11
9
In addition to the country-borne financial costs of the needed sterilization operations, possibly amplified by
the uncertainty regarding their optimal level and the consequent over-stocking, international reserve
accumulation may have important effects abroad, including the exacerbation of global current account
imbalances, downward pressures on international interest rates, distortions in the valuation of assets, and
investor strategies emphasizing a search for yield.
10
Reserve currency issuers, in particular, remain reluctant even to restore the network of swap lines
introduced in the context of the crisis, due mainly to concerns regarding the increased moral hazard it may
generate among emerging market economies, in addition to other risks that are not easily dealt with
through the use of collateral.
11
Of course, RFAs face many other challenges, such as unequal access across countries, limited availability of
resources, rigid criteria for financial support and uncertainty due to the lack of relevant evidence regarding
their reliability beyond short-term periods.
• The current international governance framework continues to be
characterized by a structural underrepresentation of emerging market
economies, as it has failed to adapt, even after accounting for the steps
taken in the midst of the global financial crisis, to the changes implied
by the increasingly important role of these economies in the
international economic and financial systems.12 Of course, other recent
developments, such as the elevation of the G-20, including the main
advanced and emerging market economies, as a major forum for
international cooperation, are steps in the right direction. However,
should existing shortcomings persist, the credibility and legitimacy of
the major multilateral institutions, and thereby their relevance for
international policy cooperation, are at risk of being further eroded.
•
Although surveillance mechanisms have been well established for long,
their failure to timely identify the build-up of macroeconomic and
financial risks and imbalances leading to the global financial crisis, is a
clear indication of their lagging behind with respect to the increasing
and complex interlinkages across both countries and policies. The
multilateral and domestic efforts that have since taken place in order to
expand and strengthen surveillance are certainly welcome.13 However,
if these monitoring mechanisms are to represent a fundamental piece
of international policy cooperation, a number of challenges need to be
properly addressed. One of them is related to the importance of a better
understanding of spillovers and boomerang effects mentioned before.
Another is the need for increased efforts towards the formulation of
more explicit, unambiguous recommendations for avenues of
international policy cooperation, together with adequate coordination
between the institutions involved-for instance through the IMF-and
a periodic follow-up of results achieved. Even though external, unbiased
and credible assessments from one or multiple technically qualified
bodies constitute a valuable input for domestic policymaking, as well as
an important guidepost for directing international cooperation efforts,
its combination with concrete proposals on the latter can enhance
substantially the usefulness and effectiveness of the surveillance work.
The challenges for surveillance are further compounded by the
difficulties to compel participating countries to adhere to the derived
policy and cooperation proposals. To this end, pure peer pressure,
although desirable and indeed helpful, has proved to be insufficient. On
the other hand, a compulsory approach would understandably be
rejected in view of its implications for sovereignty. Ex-ante agreed
sanctions have been tried in regions with a strong political commitment
to integration. However, as is well known, even in these isolated and
difficult to replicate cases, the results have been so far unsatisfactory.
The difficulties linked to efforts to furnish the surveillance function with
"teeth" are illustrated by the reluctance of some multilateral institutions
to use tools legally available to them but with potentially controversial
implications.14 This is clearly a very complex subject, but we should
continue to search for efficient enforcement mechanisms, and at least
encourage international institutions to draw upon all instruments at
their disposal whenever needed.
To conclude, I only wish to note that in the face of a world economy which is
improving but that still faces formidable challenges, the need to supplement
any required policy efforts in EMEs with international cooperation should in
my view not be the subject of much debate. There are many possible avenues
to move in this direction, with a varying degree of complexity. Unfortunately,
notwithstanding the measures adopted as a result of the global financial crisis,
as in previous similar episodes the drive towards cooperation has lost
considerable force. The consequent risks are obvious. I hope that we are not
witnessing again the historical experience of swings in international
cooperation that will make us wait for another crisis to achieve perceptible
progress towards the results we need.