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Bulletin 2010 Aug 3

Bulletin 2010 Aug 3

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Published by rodobejarano

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Published by: rodobejarano on Aug 06, 2010
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12/20/2011

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To: Organizations addressing Trade-Finance Linkages
1)
 
IMF
 
love
 
for
 
exchange
 
rate
 
management:
 
a
 
passing
 
fade?
 
2)
 
Trade
 
and
 
finance
 
in
 
G20
 
Summit
 
Declaration
 
3)
 
Report
 
for
 
G20
 
highlights
 
risk
 
of 
 
accumulating
 
trade
 
restrictions
 
4)
 
Export
 
Credit
 
Agencies
 
after
 
the
 
Global
 
Financial
 
Crisis
Report
 
5)
 
Basel
 
2
 
and
 
Availability
 
and
 
Terms
 
of 
 
Trade
 
Finance
New
 
Paper
 
6)
 
WTO
 
holds
 
discussion
 
on
 
financial
 
crisis
 
7)
 
Trade
 
considerations
 
in
 
the
 
re
regulation
 
of 
 
commodity
 
markets
Drafting
 
Committee
 
8)
 
WTO,
 
OECD
 
Secretariats
 
launch
 
call
 
for
 
Aid
for
Trade
 
case
 
stories
 
 ____________________________________________________________
 
1) IMF love for exchange rate management: a passing fade?
 A few months ago the IMF was issuing a staff paper "RethinkingMacroeconomic Policy." (IMF 2010).Most of the attention drawn by the paper was related to what was considered adramatic departure from Central Bank orthodoxy. This was the possibility ofaccepting the targeting of inflation at 4, rather than 2 percent-generally on thegrounds that having a higher inflation would give policy-makers more room tocut rates in a recession, before the rates hit zero.The press characterized it as a big change of heart in the IMF, even though, asany "staff paper," it born a clear disclaimer that it did not represent the views ofthe institution.The paper, however, was significant in a less visible and, yet, important respect:its mention of exchange rate-targeting as a tool some countries could resort to
 
in order to avert sudden exchange rate movements.A longstanding demand of civil society groups has been the need for broaderroom for exchange rate management in developing countries. This is in accountof these countries' greater reliance on trade and their position as net "takers"rather than "makers" of global monetary trends.In the words of the IMF paper:"Large fluctuations in exchange rates, due to sharp shifts in capital flows (as wesaw during this crisis) or other factors, can create large disruptions in activity. Alarge appreciation may squeeze the tradable sector and make it difficult for it togrow back if and when the exchange rate decreases."Granted, along the lines of the rest of the paper, this was not such a boldassertion, and it came as sort of an oblique reference. The reference was foundin a place where the paper's main argument was that central banks argued theywere targeting inflation. The paper said that this was, indeed, the case inadvanced economies, but that in "small open economies" the evidencesuggested central banks "also" intervened to smooth the volatility of theexchange rate.So exchange rate-targeting was presented more as something possible and afact of life, and, not to be forgotten, as accompanying, not substituting, a policyof inflation-targeting, rather than as a policy prescription. Further, the usefulnessof that practice seemed, in the eyes of the IMF, and also in a one-size-fits-allfashion, confined to "small open economies."Nonetheless, the fact that the IMF also characterized the actions of thesecentral banks as "more sensible than their rhetoric" may have allowed hopefulreaders to see a change in its approach to this practice. Let us not forget thatonly three years ago, the IMF had reviewed its Decision on BilateralSurveillance policy that had been in place for thirty years to make it all moredifficult to keep "misaligned" - that is, not floating-exchange rates. (Caliari 2007)Though the Guidance Note for implementing this Decision was eased last year,the policy itself as revised in 2007 stays in place. (Caliari 2009)Hopeful readers were up for a disappointment, though.A more recent paper called "Central Banking Lessons from the Crisis" (IMF2010a) - this one made official and submitted to Board discussion, so it can besaid to represent an institutional position- has chosen to avoid makingexchange rate-targeting the subject of any significant finding orrecommendation. Its only reference to the practice is the purely factualassertion that exchange rate stability is one of the policy objectives CentralBanks take into account (Ib. at 6-7 and footnote 38).In all fairness, those really hopeful readers might still wait further for anotherpaper, as this one seems focused on the need to include financial stability - not just price stability-as a major policy objective in Central Banking. But do not holdyour breath on it. The conclusive title suggests there are no more lessons forCentral Banking the IMF intends to draw from the crisis.
 
In fact, even the controversial statements that made the February paper famousalso seem to have been replaced by a more sober return to the "basics"generally accepted."Monetary policy should continue to focus on price stability as its primaryresponsibility" says the paper, before stating that price stability "has typicallymeant an average inflation rate of about two percent, although definitions varyacross countries." (IMF 2010a, 20-21)The potential way out from low inflation targets identified in the February paper -namely, giving room to Central Banks to loosen rates in a recession-isdismissed now: "On rare occasions, a severe crisis may cause policy interestrates to reach the zero lower bound. However, such severe crises usually stemfrom conditions that also make interest rates relatively ineffective... " In otherwords, yes, there is a risk that policy-makers might run out of space to useinterest rate-easing as a tool, but this only in situations where such easing isuseless, anyway. (Ib.)Maybe the practice of targeting exchange rates is so controversial that therecognition that "sometimes it happens" is all that can be realistically expectedin the foreseeable future. But the IMF's most recent statement of position leavesthe institution lagging further behind the reality and growing body of support forthe practice, particularly for trade-dependent economies.In a recent study reviewing the historical experience of Latin Americancountries, Frenkel and Damill come to the conclusion that"Probably the most important conclusion that can be drawn from our analysis isthat the level of the RER has had a significant influence in the macroeconomicperformance of Latin American countries. In particular, the experiencesreviewed suggest that an excessively appreciated RER can lead to disastrousoutcomes affecting short and medium term growth." (2010:42)In an environment where the space for industrial policy has been dramaticallyreduced, exchange rate management remains one of the few tools thatgovernments can employ to diversify a trade profile away from purely primaryproduction.Another economist, Mr. Dani Rodrik, has gone as far as saying that "a credible,sustained real exchange rate depreciation may constitute the most effectiveindustrial policy there is." (Rodrik 2004)The idea of influencing relative prices to promote development of non-traditionalexport sectors is one recently favored by another renowned mainstreameconomist, Mr. Barry Eichengreen. In a seminar recently held at the World Bankin Washington DC, he stated:"It's beyond the capacity of governments to identify specific industries andactivities, like green growth, to which subsidies ought to be targeted but it's notbeyond their capacity to identify the kind of broad regularities between differentsectors like manufactures, and agriculture, and services, and to try to influencethe policy mix and relative prices to get the appropriate balance between broadsectors..." (2010)

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