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The G-20 and Central Banks in the New World of Unconventional Monetary Policy

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Think Tank 20: The G-20 and Central Banks in the New World of Unconventional Monetary Policy Izak Atiyas Haroon Bhorat Kemal Derviş Peter Drysdale Claudio R. Frischtak Ippei Fujiwara Daniel Gros Paolo Guerrieri Alan Hirsch E. Fuat Keyman Homi Kharas Miguel Kiguel Donald Kohn Xue Lan Marina Larionova Wonhyuk Lim Jacques Mistral Rakesh Mohan Yoshio Okubo Guillermo Ortiz Galip Kemal Ozhan Andrey Shelepov Paola Subacchi Maria Monica Wihardja Guntram B. Wolff Qiao Yu August 2013 Think Tank 20: The G-20 and Central Banks in the New World of Unconventional Monetary Policy Izak Atiyas Haroon Bhorat Kemal Derviş Peter Drysdale Claudio R. Frischtak Ippei Fujiwara Daniel Gros Paolo Guerrieri Alan Hirsch E. Fuat Keyman Homi Kharas Miguel Kiguel Donald Kohn Xue Lan Marina Larionova Wonhyuk Lim Jacques Mistral Rakesh Mohan Yoshio Okubo Guillermo Ortiz Galip Kemal Ozhan Andrey Shelepov Paola Subacchi Maria Monica Wihardja Guntram B. Wolff Qiao Yu August 2013 CONTENTS Introduction: The G-20 and Central Banks in the New World of Unconventional Monetary Policy . 1 Kemal Derviş Vice President, Global Economy and Development, The Brookings Institution; Former Executive Head of the United Nations Development Program; Former Secretary of Treasury and Economy Minister, The Republic of Turkey; Advisor, Istanbul Policy Center Homi Kharas Senior Fellow and Deputy Director, Global Economy and Development, The Brookings Institution; Former Chief Economist, East Asia, The World Bank ARGENTINA Argentina’s Debt: the Good, the Bad and the Ugly . 6 Miguel Kiguel Former Under Secretary of Finance and Chief Advisor to the Minister of the Economy, Argentina; Former President, Banco Hipotecario; Director, Econviews; Professor, Universidad Torcuato Di Tella AUSTRALIA How Should the World View Japan’s New Economic Policy Strategy? . 9 Peter Drysdale Emeritus Professor of Economics, Crawford School of Economics and Government, The Australian National University; Head of the East Asian Bureau of Economic Research; Co-editor, East Asia Forum Ippei Fujiwara Associate Professor, Crawford School of Public Policy, The Australian National University BRAZIL The World under the New G-4 (and the Rest of Us) . 13 Claudio R. Frischtak President, Inter.B Consulting and Country Director, International Growth Center CHINA Handcuff Central Banks, Save The Global Market . 18 Qiao Yu Professor, School of Public Policy and Management, Tsinghua University Xue Lan Professor and Dean, School of Public Policy and Management, Tsinghua University THINK TANK 20: The G-20 and Central Banks in the New World of Unconventional Monetary Policy ii EUROPEAN UNION The ECB’s OMT Programme and German Constitutional Concerns . 26 Guntram B. Wolff Director, Bruegel FRANCE Uncomfortable Exits: A Tale of Two Lenders of Last Resort . 32 Jacques Mistral Nonresident Senior Fellow, The Brookings Institution; Special Advisor, Institut Français des Relations Internationales; Former Economic Advisor to the French Prime Minister GERMANY The World Economy According to an Excess Savings Country . 38 Daniel Gros Director, Centre for European Policy Studies (CEPS), Brussels INDIA Need for Thought Diversity to Combat Group-Think in Central Banking . 41 Rakesh Mohan Executive Director, International Monetary Fund; former Professor, Yale University; Deputy Governor, Reserve Bank of India INDONESIA Poor Politics That Destabilized the Good Economy . 45 Maria Monica Wihardja Part-time lecturer, University of Indonesia; former researcher, Centre for Strategic and International Studies, Jakarta ITALY The Rise of Unemployment in the Eurozone: the Worst of the Crisis is Not Over . 51 Paolo Guerrieri Professor of Economics, University of Rome Sapienza; Professor, College of Europe, Bruges JAPAN Overcoming Deflation and Moving Forward . 55 Yoshio Okubo Vice-Chairman, Japan Securities Dealers Association (JSDA) KOREA Global Imbalances, Financial Crisis and Economic Recovery . 61 Wonhyuk Lim Director and Vice President, Department of Competition Policy, Korea Development Institute (KDI) THINK TANK 20: The G-20 and Central Banks in the New World of Unconventional Monetary Policy iii MEXICO QE Exit and the Emerging Market Challenge . 65 Guillermo Ortiz Chairman, Grupo Financiero Banorte; Former Governor, Bank of Mexico; Former Secretary of Finance and Public Credit, Mexico; Former Chairman of the Board of the Bank for International Settlements RUSSIA Reinvigorating Growth Potential: Priorities for the Central Bank of Russia . 73 Marina Larionova Professor and Head of International Organizations Research Institute, Higher School of Economics, National Research University Andrey Shelepov Researcher, Global Governance Research Center, International Organizations Research Institute, Higher School of Economics, National Research University SOUTH AFRICA The Political Economy of Monetary Policy in South Africa: Real Economy Outcomes . 77 Haroon Bhorat Professor, Development Policy Research Unit, School of Economics, University of Cape Town Alan Hirsch Professor and Director, Graduate School of Development Policy and Practice, University of Cape Town TURKEY Unconventional Monetary Policy and Its Reflections on the Global Economy . 81 Galip Kemal Ozhan Research Associate, The Brookings Institution Izak Atiyas Professor, Sabanci University E. Fuat Keyman Professor and Director, Istanbul Policy Center, Sabanci University UNITED KINGDOM Coordinating the Next Move: Monetary Policy in the Post-crisis World . 88 Paola Subacchi Research Director, International Economics, Chatham House, London UNITED STATES Unconventional Monetary Policy: Moving Toward the Exit in the U .S . 92 Donald Kohn Former Vice Chairman of Federal Reserve Board of Governors; Senior Fellow, Economic Studies, The Brookings Institution THINK TANK 20: The G-20 and Central Banks in the New World of Unconventional Monetary Policy iv Introduction: The G-20 and Central Banks in the New World of Unconventional Monetary Policy* Vice President, Global Economy and Development, The Brookings Institution; Former Executive Kemal Derviş Head of the United Nations Development Program; Former Secretary of Treasury and Economy Minister, The Republic of Turkey; Advisor, Istanbul Policy Center Senior Fellow and Deputy Director, Global Economy and Development, The Brookings Homi Kharas Institution; Former Chief Economist, East Asia, The World Bank ive years after the first meeting of G-20 leaders, growing doubts about the desirability of the con- and decisive action by the central banks and tinuation of these policies. These doubts stem from Ftreasuries of the world’s major economies that the prolonged economic weakness in high-income prevented the financial crisis of 2008-2009 from economies translating into fears that these limited turning into a 1930’s style world-wide depres- benefits from unconventional monetary policy, sion, the world economy still remains fragile. The “quantitative easing (QE)”, may no longer justify the original fiscal stimulus agreed upon in the April 3rd moral hazard and adverse selection that they en- 2009 second leader’s level G-20 London meeting courage. Equity prices and prices of riskier financial has been withdrawn in the U.S. and Europe after assets in much of the world seem to have de-linked 2011, not through a coordinated decision of the from underlying real fundamentals, driven by an al- G-20, but in response to fears of rising public debt most desperate search for yield, in an environment and a political process in which these fears came where liquid funds and high quality treasury bonds to dominate the debate. In China too, fiscal policy yield a zero or even negative real return. became less expansive, after the mega-stimulus of 2009, although a mini-stimulus has been declared The economic backdrop to the St. Petersburg lead- for the summer of 2013 to counter a greater than ers’ meeting is one of such very mixed progress and expected output slowdown. great uncertainty. The essays in this collection con- tributed by leading analysts from the G-20 coun- Monetary policy, however, remained extraordinari- tries, reflect that uncertainty and strong concern ly expansionary in the U.S., the U.K., Japan and the for the world economy. The worst fears over col- eurozone. The balance sheets of the Federal Reserve lapse of the eurozone and major bankruptcies have (Fed), the Bank of England (BoE), the Bank of Ja- receded, but growth remains sluggish, job pros- pan (BoJ) and the European Central Bank (ECB) pects are weak, and many fear new bubbles in some expanded by $2 trillion, £310 billion, ¥50 trillion, asset and commodity markets. The difficulties of and €1.5 trillion, respectively between December an orderly unwinding of QE policies were clear- 2007 and December 2012. The Fed’s, the BoE’s, ly shown by the volatile market response to Fed the BoJ’s and the ECB’s balance sheets were as big Chairman Bernanke’s first statements about the as 6 percent, 7 percent, 21 percent and 15 percent possible timing of QE exit which he essentially had of their GDP in 2007, whereas in 2012, their bal- to retract. Many emerging market economies have ance sheets represented 19 percent, 27 percent, 33 experienced serious pressures on their exchange percent and 32 percent of their 2012 GDP levels, rates due to significant weakening of inward capital respectively. Repeated rounds of quantitative eas- flows. The first two quarters of 2013 also saw a gen- ing no doubt helped the U.S. economy recover, and eral slowdown in emerging market GDP growth, the actions of the ECB prevented the
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