On VoxEU, Stefan Avdjiev, Robert McCauley, and Hyun Song Shin discuss how a focus on net capital flows between countries can mislead policy analysts if they neglect heterogeneity between sectors in a country and/or non-congruence of economic and currency area that is, if they assume the “triple coincidence” between economic area, decision-making unit, and currency area.
The triple coincidence misleads
because it obscures gross flows, …
in that it gives insufficient weight to international funding currencies that are extensively borrowed outside the borders of their home countries …
if it glosses over the relevant decision-making unit by aggregating too much.
On VoxEU, representatives of the German Council of Economic Experts outline the German crisis narrative. In disagreement with the ‘consensus view’ outlined in Baldwin et al. (2015) the German economists including Lars Feld, Christoph Schmidt, Isabel Schnabel and Volker Wieland do not want to
implicate the ‘intra-Eurozone capital flows that emerged in the decade before the crisis’ as the ‘real culprits’. … [Rather] it is the government failures and the failures in regulation and supervision leading to those excessive developments that should take centre-stage in the Crisis narrative.
Consequently, their assessment of the policy response to the crisis is positive:
While the alleged consensus summary concludes that ‘the whole situation was made much worse by poor crisis management’, our view is that the ‘loans for reforms’ rationale underlying the rescue approach was not only sensible, since it was the only way to successfully address the underlying causes of the Crisis. It also worked and substantially improved matters.
Sensibly, the writers favor the
objective of retaining the unity of liability and control in all relevant fields of economic policy.
They promote the ‘Maastricht 2.0’ framework proposed earlier by the German Council.
In the 17th Geneva Report on the World Economy (Low for Long? Causes and Consequences of Persistently Low Interest Rates), Charles Bean, Christian Broda, Takatoshi Ito and Randall Kroszner take up the theme of a recent report by the White House Council of Economic Advisors (see previous blog post). In the abstract, some of the authors’ conclusions are summarized as follows:
… aggregate savings propensities should fall back as the bulge of high-saving middle-aged households moves through into retirement and starts to dissave; this process has already begun. And though Chinese financial integration still has some way to run, the net flow of Chinese savings into global financial markets has already started to ebb as the pattern of Chinese growth rotates towards domestic demand rather than net exports. Finally, the shifts in portfolio preferences may partially unwind as investor confidence slowly returns. But … the time scale over which such a rebound in real interest rates will be manifest is highly uncertain and will be influenced by longer-term fiscal and structural policy choices.
One chapter in the report discusses the Japanese experience.
In a Vox column, Pinar Yeşin argues that
abnormally low values of net flows were not necessarily driven by surges of private capital inflows. In fact, declined capital outflows that are less correlated with capital inflows appear to be the main factor. These findings suggest that the financial crisis generated a breaking point for capital flows to and from Switzerland.