Australia has enjoyed fifteen years of uninterrupted economic expansion since 1992 despite shocks such as the Asian crisis in 1997-98 and the information technology bust in 2000-01. This resilient economic performance owes much to wide-ranging structural reforms and the improved frameworks for monetary and fiscal policies that were implemented after the Australian dollar was floated in 1983. In addition to gaining the expected macroeconomic benefits from exchange rate flexibility, the float appeared to help motivate and facilitate the subsequent reforms. Australia's experience with adapting to a floating currency may therefore be of broader interest.
China has achieved tremendous economic progress in the last three decades, but there is much work to be done to make the economy resilient to large shocks, ensure the sustainability of its growth, and translate this growth into corresponding improvements in the economic welfare of its citizens. We discuss the complex challenges that Chinese policymakers face in striking the right balance in terms of speed and coordination of reforms. We argue that China's current stage of development, along with its rising market orientation and increasing integration with the world economy, may make the incremental and piecemeal approaches to reforms increasingly untenable and, in some cases, could even generate risks of their own. The present favorable domestic and external circumstances provide an excellent window of opportunity for bolder reforms and for tackling some deep-rooted problems without causing much economic disruption.
In this paper, we develop a proposal for a controlled approach to capital account liberalization for economies experiencing large capital inflows. The proposal essentially involves securitizing a portion of capital inflows through closed-end mutual funds that issue shares in domestic currency, use the proceeds to purchase foreign exchange from the central bank and then invest the proceeds abroad. This would eliminate the fiscal costs of sterilizing those inflows, give domestic investors opportunities for international portfolio diversification and stimulate the development of domestic financial markets. More importantly, it would allow central banks to control both the timing and quantity of capital outflows. This proposal could be part of a broader toolkit of measures to liberalize the capital account cautiously when external circumstances are favorable. It is not a substitute for other necessary policies such as strengthening of the domestic financial sector or, in some cases, greater exchange rate flexibility. But it could in fact help create a supportive environment for these essential reforms.
Mr. Eswar S Prasad, Mr. Qing Wang, and Mr. Thomas Rumbaugh
This paper reviews the issues involved in moving towards greater exchange rate flexibility and capital account liberalization in China. A more flexible exchange rate regime would allow China to operate a more independent monetary policy, providing a useful buffer against domestic and external shocks. At the same time, weaknesses in China’s financial system suggest that capital account liberalization poses significant risks and should be a lower priority in the short term. This paper concludes that greater exchange rate flexibility is in China’s own interest and that, along with a more stable and robust financial system, it should be regarded as a prerequisite for undertaking a substantial liberalization of the capital account.
This paper assesses the eventual replacement of the currencies of the GCC countries with a common currency. It concludes that a properly implemented currency union may contribute to enhance economic efficiency in the region, deepen regional integration, and develop its non-oil economy. However, it cautions that a currency union should be seen as only one component of a much broader integration effort. This should include the removal of the distortions that inhibit intraregional trade and investment, agreements on policy frameworks to ensure macroeconomic stability, and further political integration. The paper also addresses the choice of exchange rate arrangement for the unified currency.
This paper highlights the macro and microeconomic challenges associated with success of the effort to mobilize 0.7 percent of GNP for official development assistance (ODA). To promote achievement of the Millennium Development Goals, enhanced ODA must be as productive as possible. In weighing the distribution of enhanced ODA among countries, the paper emphasizes the need to limit potentially adverse “real transfer effects.” It recommends a multi-pronged approach to ODA that includes, inter alia, in addition to direct bilateral transfers, enhanced use of trust funds and the financing of global public goods.
The Canadian experience with a floating exchange rate regime can shed some light on the question of whether A question of current interest in many parts of the world is whether with growing economic integration among groups of countries makes a fixed exchange rate, or even a common currency, becomes more desirable. This paper looks at the lessons that one may draw from tThe Canadian experience, with a floating exchange rate regime, especially since the inception of the 1989 U.S.-Canada Free Trade Agreement, suggests. We find that exchange rate flexibility has not prevented economic integration between Canada and the United States from increasing substantially, during the 1990s, and has played a useful role in buffering the Canadian economy against asymmetric external shocks. A fixed exchange rate thus does not seem to be a prerequisite for economic integration. It may, however, yield substantial have benefits for some countries that lack monetary credibility or that may be tempted by self-destructive beggar-thy-neighbor policies.
The past decade has witnessed a steady increase in outstanding external sovereign debt issued by emerging market economies. This paper examines some of the “received wisdom” regarding the benefits of external financing of domestic budget deficits and argues that it is often predicated on a narrow set of assumptions and incomplete evaluation of the underlying costs. The paper also suggests alternative sources of financing that can help capture some of the benefits associated with foreign financing without all of its costs.
This paper describes the basic structure, underlying philosophy, and key behavioral properties of MULTIMOD. It also focuses on several recent applications of macromodels in the IMF’s policy analysis, emphasizing that most questions put forward for analysis with models like MULTIMOD are initially posed in ways that cannot be addressed by simply pushing a computer key. Meaningful macromodel-based policy analysis requires a sensibly structured and parameterized macromodel, but it also generally requires considerable probing of the nature of the policy issues in order to reformulate policy questions in terms of well-defined exogenous shocks.
The more advanced Central and Eastern European Countries (CEECs) face an evolving set of considerations in choosing their exchange rate policies. On the one hand, capital mobility is increasing, and this imposes additional constraints on fixed exchange rate regimes, while trend real appreciation makes the combination of low inflation and exchange rate stability problematic. On the other hand, the objectives of EU and eventual EMU membership make attractive a peg to the euro at some stage in the transition. The paper discusses these conflicting considerations, and considers the feasibility of an alternative monetary framework, inflation targeting.