Using Fiscal Policy to Drive Trade Rebalancing Turns Out To Be Hard

The idea behind “fiscally-driven external rebalancing” is straightforward. If countries with external (e.g. trade) surpluses run expansionary fiscal policies, they will raise their own level of demand and increase their imports. More expansionary fiscal policies would generally lead to tighter monetary policies, which also would raise the value of their currencies. And if countries with external (trade) deficits run tighter fiscal policy, they will restrain their own demand growth and thus limit imports. Firms in the countries with tighter fiscal policies and less demand will start to look to export to countries with looser fiscal policies and more demand. This logic fits well with IMF orthodoxy: the IMF generally finds that fiscal policy has a significant impact on the external balance, unlike trade policy.* But it often encounters opposition, as it implies that the fiscal policy that is right for one country can be wrong for another. Many
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The Story in TIC Data Is That There Is Still No (New) Story

The basic constellation in the post-BoJ QQE, post-ECB QE world marked by large surpluses in Asia and Europe but not the oil-exporters has continued. Inflows from abroad have come into the U.S. corporate debt market—and foreigners have fallen back in love with U.S. Agencies. Bigly. Foreign purchases of Agencies are back at their 05-06 levels in dollar terms (as a share of GDP, they are a bit lower). And Americans are selling foreign bonds and bringing the proceeds home. The TIC data doesn’t tell us what happens once the funds are repatriated. Foreign official accounts (cough, China and Saudi Arabia, judging from the size of the fall in their reserves) have been big sellers of Treasuries over the last two years. As one would expect in a world where emerging market reserves are falling (the IMF alas has stopped breaking out emerging market and advanced economy reserves in
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The Combined Surplus of Asia and Europe Stayed Big in 2016

A long time ago I confessed that I like to read the IMF’s World Economic Outlook (WEO) from back to front. OK, I sometimes skip a few chapters. But I take particular interest in the IMF’s data tables (the World Economic Outlook electronic data set is also very well done, though sadly a bit lacking in balance of payments data).* And the data tables show the combined current account surplus of Europe and the manufacturing heavy parts of Asia—a surplus that reflects Asia’s excess savings and Europe’s relatively weak investment—remained quite big in 2016. China’s surplus dropped a bit in 2016, but that didn’t really bring down the total surplus of the major Asian manufacturing exporters. Much of the fall in China’s surplus was offset by a rise in Japan’s surplus. The WEO data tables suggest that net exports accounted for about half of Japan’s 1 percent 2016 growth—Japan
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When Did China “Manipulate” Its Currency?

There is no single definition of manipulation, to be sure—so no way of definitively answering the question. Over the last ten or so years, manipulation has been equated with “buying foreign exchange in the market to block appreciation.” That definition is certainly built into the criteria laid out in the 2015 Trade Enforcement Act. But “buying reserves to block appreciation” wasn’t hardwired into the 1988 act, which has a much more elastic definition of manipulation. Yet even if the 2015 Trade Enforcement Act isn’t the only possible definition of manipulation, it still provides a bit of guidance – as President Trump implicitly recognized today: “Mr. Trump said the reason he has changed his mind on one of his signature campaign promises is that China hasn’t been manipulating its currency for months.” The thresholds of being called out for “enhanced analysis” that the Treasury was required to set
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Does Currency Pressure Work? The Case of Taiwan

I confess that I probably am the only person in the world who—setting aside the internal politics of the Trump White House—would be excited to write the Treasury’s foreign currency report this quarter. Not because of China. I would say China met the existing 2015 manipulation criteria in the past and I would put the criteria under review (I personally think the bilateral surplus analysis should be complemented with value-added measures, which would reallocate some of China’s surplus to Japan, Korea, Taiwan, and others).* I might even find a way to warn that a country that guides its currency down could meet the 1988 definition manipulation even if it is selling some of its foreign currency reserves to limit the pace of depreciation (a controlled depreciation is hard, and usually requires reserve sales). But not name China now. The U.S. would be completely isolated in naming China now,
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So, Is China Pegging to the Dollar or to a Basket?

Does China manage its currency against the dollar, against a basket, or to whatever is most convenient at any given point time? Cynics have argued that China seems to peg to the dollar when the dollar is going down and the basket when the dollar is going up. The yuan’s moves in March at least raise the question again, even if the signal is relatively weak. The yuan has hewed fairly closely to the dollar over the last few weeks. And in March that meant some modest depreciation against the basket (though the depreciation against the basket was partially reversed in the first week of April when the dollar rose). In other words, had China managed more against a basket, the yuan should have appreciated a bit more against the dollar than it did. Managing the yuan against the dollar is in some ways less risky than managing against a Continue reading "So, Is China Pegging to the Dollar or to a Basket?"

China’s 2016 Reserve Loss Is More Manageable Than It Seems on First Glance

Martin Wolf’s important column does a wonderful job of illustrating the basic risk China poses to the world: at some point China’s savers could lose confidence in China’s increasingly wild financial system. The resulting outflow of private funds would push China’s exchange rate down, and give rise to a big current account surplus—even if the vector moving China’s savings onto global markets wasn’t China’s state. History rhymes rather than repeating. And I agree with Martin Wolf’s argument that so long as China saves far too much to invest productively at home, it basically is always struggling with a trade-off between accepting high levels of credit and the resulting inefficiencies at home, or exporting its spare savings to the world. I never have thought that China naturally would rebalance away from both exports and investment. After 2008, it rebalanced away from exports—but toward investment. There always was a risk that could
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