The exchange rate analysis in the IMF’s flagship publication, World Economic Outlook (WEO), came in for praise—and some constructive criticism—at an April 19 seminar at the Peterson Institute for International Economics (IIE), where a small group of academics and policymakers debated the role that adjustments in real exchange rates can play in reducing global economic imbalances. But the audience was more skeptical about the outcome of the IMF’s first multilateral consultations. William Cline, IIE fellow and author of a recent book on the United States as a debtor nation, captured the mood when he said the IMF seemed very hands-off in its approach by calling only for “market-led exchange rate adjustment.”
Simon Johnson, the Fund’s new Economic Counsellor, said “the consultations represented a perhaps unprecedented—and certainly impressive—development.” He pointed out that the report on the first multilateral consultation, released during the April 2007 IMF-World Bank meetings, “provides a set of benchmarks against which one can assess and discuss progress made toward reducing global imbalances.” Johnson also told the audience that reducing global imbalances is not only about exchange rates—rebalancing global demand will have to play an important role as well.
Scenario for a dollar decline
A lively discussion followed Roberto Cardarelli’s presentation of Chapter 3 of the WEO, which argues that a correction in the U.S. trade balance can be achieved through a smaller depreciation in the real value of the dollar than is commonly assumed. Most of the participants—who included Michael Mussa, the IMF’s former Economic Counsellor and now an IIE fellow; Nancy Jacklin, former IMF Executive Director for the United States; and a number of participants from the U.S. Federal Reserve Board—all welcomed the WEO’s analysis. But most of them wanted to know how the conclusions would translate into policy actions in the real world, especially when it came to China and its exchange rate policies. Mussa said the WEO analysis placed the IMF “pretty much at the center of what most responsible economists understand to be the nature of the problem of global imbalances.” But like Cline, he argued that, while necessary, expenditure switching between the United States and the rest of the world would not be enough to solve the global imbalances problem and that “substantial exchange rate adjustment” was needed.
Jacklin said that to move the policy debate forward “we need research that shows that fixed exchange rates don’t work and are in fact damaging to the global economy.” And while positive and encouraging feedback was an essential tool in policy discussions with countries, surveillance should not be “all happy talk,” she said.
In his closing remarks, Johnson said the IMF would strive to be “an honest truth teller” in its bilateral and multilateral surveillance, and that it would carefully evaluate progress toward the benchmarks to which the participants in the multilateral consultations had agreed. “If the policies outlined by the five countries are implemented, this would reduce global imbalances by 1-1¾ percent of world GDP over the next four years from a baseline of about 6 percent,” he said.
Copies of World Economic Outlook: Spillovers and Cycles in the Global Economy, April 2007 are available for $57.00 ($54.00 academic rate) each from IMF Publication Services. The full text is also available on the IMF’s website (www.imf.org).
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