Remarks on the role of the exchange rate and structural policies in correcting current account imbalances
Mr. Rintaro Tamaki, Deputy Secretary-General, OECD
SEMINAR ON EXCHANGE RATES AND TRADE27-28 March 2012
1
Impact of exchange rates on trade
There is no consensus on:
• Methodology to measure exchange rate alignment
• Impact of exchange volatility on trade
• Magnitude of the impact of exchange rates on trade flows.
2
Impact of exchange rates on trade is unclear due to:
• Potentially high import content of exports in globally integrated economies
• Price elasticities of demand differ across products
• Different price transmission mechanisms according to product and market
• Hedging and other risk management practices differ by size of firm.
3
Global imbalances widened prior to the crisis (Sum of absolute current accounts in US$, as % of area-GDP)
Global current account imbalances
Euro area current account imbalances
Source: OECD Economic Outlook, November 20114
Reforms that are desirable on welfare, equity or efficiency grounds may also reduce global imbalances
• Developing social welfare systems in China and other Asian economies would reduce precautionary saving, so moderating current account imbalances in surplus countries.
• Removing competition-unfriendly product market regulation could encourage capital spending in countries like Japan and Germany.
• Financial market reforms may relax borrowing constraints in emerging economies and thus help to reduce the high saving rates.
• Removing policy distortions that encourage consumption such as tax deduction of interest payments on mortgages might increase household saving in some countries including the United States.
+ More ambitious fiscal consolidation would reduce imbalances because government indebtedness is typically higher in deficit countries.
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A scenario analysis shows that fiscal consolidation combined with structural reforms can substantially
reduce global imbalances
Absolute sum of global current account balances as % of world GDP
Note: The size of imbalances is measured as the sum of the absolute current balance-to-GDP ratios, weighted by
2009 GDP (in current USD). The starting values are based on the current-account-to-GDP ratios in 2009.
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The effect of structural reforms and fiscal consolidation could markedly reduce external
imbalances in some euro area countries
Fiscalconsolidation
Fiscal consolidationand structural reforms
7
8
Export-led Recovery from 2002 to 2007 Change of consumption & export
80
100
120
140
160
180
200
Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ
00 01 02 03 04 05 06 07 08 09 10
ExportNominal( )
ConsumptionNominal( )
Source Cabinet Office( )
Start of expansion phase( :2002 1Q 100= )
Export: (J an. 2002)× 1.72
Consumption: (J an. 2002)× 1.04
The longest expansion phase in the postwar period【 】 Recovery phase【 】
Global Financial Crisis
Exchange rate and Stock price (2011 ~ )
7500
8000
8500
9000
9500
10000
10500
11000
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3
2011 2012
(Yen)
74
76
78
80
82
84
86
88(Yen)
(Source)Bloomberg
USD/ J PY(right scale)
Nikkei Stock Average(left scale)
9
Sensitivity of stock price to exchange rate (1-year beta)
- 1.5
- 1
- 0.5
0
0.5
1
1.5
2
2.5
2000
/10/
2
2001
/2/2
2001
/6/2
2001
/10/
2
2002
/2/2
2002
/6/2
2002
/10/
2
2003
/2/2
2003
/6/2
2003
/10/
2
2004
/2/2
2004
/6/2
2004
/10/
2
2005
/2/2
2005
/6/2
2005
/10/
2
2006
/2/2
2006
/6/2
2006
/10/
2
2007
/2/2
2007
/6/2
2007
/10/
2
2008
/2/2
2008
/6/2
2008
/10/
2
2009
/2/2
2009
/6/2
2009
/10/
2
2010
/2/2
2010
/6/2
2010
/10/
2
2011
/2/2
2011
/6/2
2011
/10/
2
2012
/2/2
NKY- USD/ J PY
DAX- USD/ EUR
0.41
- 1.27
Appreciation of Yen/Euro correlated withLower stock prices
Appreciation of Yen/Euro correlated withHigher stock prices
10
The current account balance of Japan (% of GDP)
11
References
• OECD (2011), “The Impact of Structural Reforms on Current Account Imbalances”, OECD Economics Department Policy Notes, No. 3.
• Kerdrain, C., Koske, I. and I. Wanner (2010), “The Impact of Structural Policies on Saving, Investment and Current Accounts”, OECD Economics Department Working Papers, No. 815.
• Huchet-Bourdon, M. and J. Korinek (2011), “To What Extent Do Exchange Rates and their Volatility Affect Trade?”, OECD Trade Policy Working Papers, No. 119, OECD Publishing. http://dx.doi.org/10.1787/5kg3slm7b8hg-en
• Huchet-Bourdon, M. and J. Korinek (2012), “Trade Effects of Exchange Rates and their Volatility: Chile and New Zealand”, OECD Trade Policy Working Papers, No. 136, OECD Publishing. http://dx.doi.org/10.1787/5k9cvpldq533-en
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