Morris Goldstein

Banking Crises in Emerging Economies: Origins and Policy Options

This paper looks at banking crises in the developing world. It discusses eight major types of cause, including both macroeconomic and supervisory factors. It discusses policy options, drawing on actual experience in developing and developed economies. Contains international statistical comparisons.

China's Exchange Rate Policy Dilemma

This paper summarizes key aspects of China’s exchange rate policy, outlines the problems it creates for both China and the global economy, and proposes a feasible policy compromise.

China's Role in the Revived Bretton Woods System: A Case of Mistaken Identity

This paper argues that the way in which China is portrayed in the revived Bretton Woods thesis (BW2) is not consistent with several important trends in, and features of, the Chinese economy; nor does the strategy in the BW2 seem sensible for Chinas long-term economic development. Whether it is the behavior of Chinas real exchange rate, the costs of sterilizing large reserve inflows, the role that FDI plays in financing Chinas fixed asset investment, the participation of foreign firms in Chinas exports and in the ownership of export industries, or the political economy of trade protectionism in the United States, the BW2 does not provide a good explanation either for how China has behaved in the past or how it should behave in the future. We conclude that the BW2 does not provide a persuasive story for why large US current account deficits and undervalued Asian exchange rates can or should continue for the next decade or longer.

Debt Sustainability, Brazil, and the IMF

Those who have watched financial crises in emerging economies over the past two years would have noticed two things. First, there has been a high concentration of financial crises in Latin America. Second, debt problems have been at the heart of several recent crises, including the prominent ones in Argentina, Brazil, Turkey, and Uruguay. This paper discusses issues of debt sustainability in emerging economies. After providing in section II a brief account of the hard times that have recently fallen on Latin America, Goldstein presents in section III a few summary debt statistics for several recent crisis economies. Section IV draws attention to a group of pitfalls in the standard framework for assessing government debt sustainability in emerging economies. Section V examines the factors influencing near-term debt dynamics in Brazil. After outlining several positive features of the Brazilian economy that did not exist in Argentina on the eve of the latters recent crisis, he lays out the arguments for expecting that economic growth in Brazil this year will be slow (only slightly above 1 percent), that the real interest rate on the public debt will be relatively high (about 10-1/2 percent), and that the government is unlikely to deliver a primary surplus in the budget much beyond 4 percent of GDP. Despite the good start made by the new Lula government, the author maintains that the debt situation remains precarious; he argues that the Brazilian authorities should aim for a primary surplus, particularly when the global economy is heading into a period with increased downside risk. He also explains why Brazils central bank should be granted (de jure) operational independence as soon as possible and why maximum efforts should be made to negotiate trade arrangements that increase Brazils low level of trade openness. If the recent market rally fizzles and interest rates, capital flows, and the exchange rate again take a significant adverse turn, serious consideration ought to be given to doing a major debt restructuring with the cooperation and support of the International Monetary Fund (IMF). Finally, in section VI, Goldstein draws some implications of these debt issues for the policies of the IMF and of its major shareholders (the G-7 countries). He concludes that IMF surveillance needs to pay much greater attention than it has in the past to the build-up of vulnerable domestic and external debt positions in emerging economies, that the Fund has to adopt a tougher position in making debt sustainability a key condition for IMF lending, and that there would be an important role for IMF financing in easing the adjustment costs of a necessary debt restructuring.

Too Big to Fail: The Transatlantic Debate

Although the United States and the European Union were both seriously impacted by the financial crisis of 2007, resulting policy debates and regulatory responses have differed considerably on the two sides of the Atlantic. In this paper the authors examine the debates on the problem posed by “too big to fail” financial institutions. They identify variations in historical experiences, financial system structures, and political institutions that help one understand the differences of approaches between the United States, EU member states, and the EU institutions in addressing this problem. The authors then turn to possible remedies and how they may be differentially implemented in America and Europe. They conclude on which policy developments are likely in the near future.

Characteristics of a successful exchange rate system

This study identifies the key characteristics of a successful exchange rate system. It focuses on regimes in the industrial countries and consider the implications for the operation of the international monetary system.

Coping with Too Much of a Good Thing: Policy Responses for Large Capital Inflows in Developing Countries

In discussing the causes and consequences of large capital inflows to developing countries, the author emphasizes two things. First, although there are legitimate grounds for an optimistic long-term outlook on private capital flows to developing countries, there is little to suggest that the volatility of capital flows will end. In designing policy strategies to accommodate this volatility, a premium should be put on credibility, resilience, and flexibility. Second, country differences notwithstanding, host countries need to respect the basics of adjustment and finance in designing their policy response to large inflows. Host countries that want to keep using the nominal exchange rate as their key nominal anchor and that do not want to accept much appreciation in their real exchange rate must be prepared to tighten fiscal policy. This is the most reliable way to reduce aggregate demand, keep inflation in check, and limit deterioration of the current account. Regarding sterilization policy, domestic interest rates will be higher and the size of the inflow will be larger with sterilization than without it. Not that sterilization necessarily need be avoided; in the early stages of inflow, it can help moderate or even offset the induced expansion of domestic credit. But with high capital mobility, sterilization becomes more expensive and less effective the longer it is used. Effective regulation and supervision are important in ensuring the best use of large inflows of foreign resources. It makes a big difference, for example, if banks use their higher reserves to lend for productive investment and human capital formation than if they use them to fund speculative activities that eventually translate into nonperforming loans (and perhaps a large public sector liability as well). Careful assessment of credit risk and of maturity mismatches are essential if banks are to help the private sector earn a rate of return greater than the cost of capital. Similarly, good disclosure and accounting standards are essential for accurate pricing of risk in both banking and securities markets. These and similar measures are worth implementing even without large capital inflows. Beyond dealing with surges in capital inflows, host countries must decide the optimal speed at which they wish to move toward full capital account liberalization.

Exchange rate volatility and misalignment: evaluating some proposals for reform

In this paper, we analyze several proposals for reducing the volatility and/or misalignment of key-currency exchange rates. The proposals examined are a system of target zones, the imposition of controls or taxes on international capital flows, and a strengthening of international coordination over economic policies. We also review key characteristics of the behavior of major-currency exchange rates over the period of floating rates and examine the various criteria or standards for drawing inferences about excess volatility and misalignment. In evaluating exchange rate volatility, attention is directed toward the influence of the exchange rate regime, to the behavior of fundamentals, to the volatility of both goods prices and other asset prices, to the costs of exchange rate volatility, and to the nature of shocks facing the economy. Turning to misalignment, we examine the strengths and weaknesses of the purchasing-power-parity approach, of the underlying balance approach, and of the sustainability approach. We argue that inferences about excess exchange rate volatility and misalignment are subject to wide margins of error and that the exchange rate experience of the past 15 years is subject to multiple interpretations.

A (Lack of) Progress Report on China's Exchange Rate Policies

This working paper assesses the progress made in improving Chinas exchange rate policies over the past five years (that is, since 2002). I first discuss four indicators of progress on Chinas external imbalance and its exchange rate policies—namely, the change in (and level of) Chinas global current account position, movements in the real effective exchange rate of the renminbi (RMB), the role of market forces in the determination of the RMB, and Chinas compliance with its obligations on exchange rate policy as a member of the International Monetary Fund (IMF). I then discuss why the lack of progress in improving Chinas exchange rate policies matters for the economies of the China and the United States and for the international monetary and trading system. I also argue that several popular arguments and excuses for why more cannot be accomplished on removing the large undervaluation of the RMB are unpersuasive. Finally, I consider what can and should be done by China, the United States, and the IMF to accelerate progress over the next year or two.

US Credit Crisis and Spillovers to Asia

We review key highlights of the global credit crisis. We then consider how financial turmoil in the largest advanced economies might be transmitted to East Asia. The focus is on foreign trade links, international capital flows, currency market pressures and mismatches, financial sector fragilities, and countercyclical monetary and fiscal policy actions. We introduce a set of vulnerability indicators and explore whether an ordinal ranking of East Asian economies according to these vulnerability indicators seems to be related to the cross-country differences in estimated slowdowns of economic growth during the crisis. Finally, we discuss how Asian economies might encourage the adoption of a stronger regulatory and supervisory framework in the USA and whether some Asian economies and the USA might pursue a more “balanced” growth strategy after the crisis.