Daniela Gabor — MMT Meets Rey’s Dilemma: A Balance Sheet View Of Capital Flight (Coming Soon To An Em Country Near You)

Recently, a colleague emailed with the following set of questions: ‘a balance sheet approach to defending currencies. Do you know literature that explains in detail the globally interlocking balance sheets between central banks, commercial banks and what happens when a national government has to defend its currency? What is the role of national and foreign reserves and how do they travel these balance sheets in the process of trying to defend a currency? I came back to this question when discussing the Swedish fight to defend the Dollar-pegged Krona in the early 90s and the promise of MMT? Most particularly we wondered to what extent national governments can just issue Krona and use them to buy foreign reserves or what sets the limits exactly to this attempt?' 

My MMT friends do have answers to these questions (and they do spend a lot of time defending MMT from critiques that it doesnt consider balance of payment constraints to monetary sovereignty). I thought I would answer these questions a la Minsky, with balance sheets, since that’s how I teach my undegrad students about exchange rate management in emerging/developing countries. I teach by setting those questions within the broader conversations about global liquidity, global financial cycles and Rey’s dilemma – independent monetary policy is only possible if countries manage capital flows (capital controls)....

Critical Macro Finance

MMT Meets Rey’s Dilemma: A Balance Sheet View Of Capital Flight (Coming Soon To An Em Country Near You)
Daniela Gabor | Professor of Economics and Macro-Finance, University of West England Bristol

Joseph P. Joyce — Current Account Deficits and Safe Assets

Global appetite for US Treasuries as "safe assets." This is a primary function of a reserve currency as a saving vehicle that is regarded as a safe haven.

Economonitor
Current Account Deficits and Safe Assets
Joseph P. Joyce

IMF Releases Data on the Currency Composition of Foreign Exchange Reserves Including Holdings in Renminbi

China's total foreign reserve holdings are in excess of ten trillion US.

IMF Press Release — 31 March 2017
IMF Releases Data on the Currency Composition of Foreign Exchange Reserves Including Holdings in Renminbi

Constantin Gurdgiev — Russian Central Bank Targets Rebuilding of Foreign Reserves

Recently, speaking at a banking conference in St Petersburg, Elvira Nabiullina, head of the Central Bank of Russia outlined the CBR position on foreign exchange reserves. Nabiullina note that Russian reserves are large - sufficient to cover almost 11 months of imports. However, Nabiullina's 'comfort zone' target for the reserves to cover 2-3 years of "substantial capital outflows", implying she would like to see Russian reserves rising back to USD500 billion mark. Nabiullina is now targeting purchases of forex over the next few years to drive up reserves and to that objective she has been buying on average USD200mln worth of forex per day since mid-May.

In line with forex reserves rebuilding objective, Nabiullina cautioned about markets expectations of further large scale cuts to interest rates as the CBR is trying to balance out inflation targeting (requiring tighter monetary policy), investment supports (requiring looser policy) and accumulation of reserves (implying looser policy).

Per Nabiullina: "Attempts to reduce the interest rates too fast or even acquire certain assets may simply lead to stronger inflation, to an outflow of capital or to dollarisation of the economy, and that would slow down the economic growth, other than promote it."....

True Economics
Russian Central Bank Targets Rebuilding of Foreign Reserves
Constantin Gurdgiev

Dean Bakler — China's Central Bank Announces Job Creation Program for the United States

That may be a bit of an overstatement, but the comments from Yi Gang, a deputy governor at China's central bank, deserved much more attention than they received. According to Bloomberg, YI announced that the bank would no longer accumulate reserves since it does not believe it to be in China's interest. The implication is that China's currency will rise in value against the dollar and other major currencies....

CEPR
China's Central Bank Announces Job Creation Program for the United States
Dean Baker

The value of China's currency is set by the peg it chooses. Unless China also decides to relax the peg, the move will not necessarily affect the relative value of Chinese currency.

The decision "not to continue accumulating reserves" means that China will reduce its purchase of foreign government securities like US Treasuries. This would mean either reducing its surplus trade balance by increasing imports relative to exports or increasing foreign direct investment, which could raise employment in the country in which China was investing its trade surplus. The other way that China could reduce its external sector is by domestic rebalancing and shifting output to domestic use — Chinese workers working for themselves instead of foreigners.

So this move could but not necessarily benefit employment in countries that presently run a trade deficit with China.

 

Brett Fiebiger — The International Dimensions Of Currency Autonomy

Modern economies operate on fiat monetary systems with an accent on plural. Anyone who takes a look at policymaking decisions around the global economy will soon observe that there seems to be substantial differences in the ability of policymakers to determine macro policies… why? In this post I will seek to provide some answers. The gist of it is that there are differing currency regimes in the global economy and macro policy autonomy exists on a spectrum of heterogeneous experiences.

Read it at Pragmatic Capitalism
The International Dimensions Of Currency Autonomy

By Brett Fiebiger, PhD
(Cross-posted at Modern Monetary Realism)