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Global Imbalances, Exchange Rate Pegs and Capital Flows: A Closer Look

Listed author(s):
  • Paul van den Noord


This paper presents a stylised model in which either a savings glut or an exchange rate peg in emerging economies drives down the level of interest rates in advanced economies and, when it hits the zero-rate bound, produces a welfare loss. It shows that structural reform in the pursuit of better social protection and financial markets in the emerging economies reduces this negative welfare spillover. An extension of the model with the short-run dynamics of exchange-rate and capital movements shows that adverse asymmetric shocks can lead to a race to the bottom of interest rates. In that case the global coordination of monetary policies is welfare enhancing for both groups of economies. However, the coordinated equilibrium is unstable, which indicates that strong pre-commitment arrangements are required to maintain coordination. This disadvantage diminishes if structural reform is adopted to reduce the volatility in capital flows. Les déséquilibres mondiaux, l'arrimage des taux de changes et les mouvements de capitaux : examen à la loupe Ce document présente un modèle simplifié dans lequel une surabondance de l’épargne ou un mécanisme d’arrimage des taux de change dans des économies émergentes fait baisser le niveau des taux d’intérêt dans les économies avancées et aboutit, lorsque l’on se heurte à la limite des taux nuls, à une perte de bien-être. Il montre que les réformes structurelles visant à améliorer la protection sociale et les marchés de capitaux dans les économies émergentes réduisent ces retombées négatives sur le bien-être. Un élargissement du modèle tenant compte de la dynamique de court terme des taux de change et des mouvements de capitaux montre que des chocs asymétriques négatifs peuvent déboucher sur une surenchère à la baisse des taux d’intérêt. Dans ce cas, une coordination mondiale des politiques monétaires améliore le bien-être des deux groupes d’économies. Toutefois, l’équilibre résultant de cette coordination est instable, ce qui indique la nécessité de solides engagements préalables visant à maintenir la coordination. Ce désavantage diminue en cas d’adoption de réformes structurelles permettant de réduire la volatilité des mouvements de capitaux.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 856.

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Date of creation: 08 Apr 2011
Handle: RePEc:oec:ecoaaa:856-en
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