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Asia Economic Policy Conference Sponsored by the Federal Reserve Bank of San Francisco POLICY CHALLENGES IN A DIVERGING GLOBAL ECONOMY Asia Economic Policy Conference Sponsored by the Federal Reserve Bank of San Francisco POLICY CHALLENGES IN A DIVERGING GLOBAL ECONOMY Edited by Reuven Glick Mark M. Spiegel Asia Economic Policy Conference Sponsored by the Federal Reserve Bank of San Francisco San Francisco, California November 19–20, 2015 Library of Congress Control Number: 2016944231 The articles in this publication can be obtained in electronic form from the Federal Reserve Bank of San Francisco’s website: http://www.frbsf.org/economic-research/events/2015/november/ 2015-asia-economic-policy-conference/ Opinions expressed are the views of the authors and not necessarily those of the Federal Reserve Bank of San Francisco or the Federal Reserve System. Contents Foreword ...................................................... 1 John C. Williams, President and CEO, Federal Reserve Bank of San Francisco Conference Summary .......................................... 3 Reuven Glick, Group Vice President, Federal Reserve Bank of San Francisco Mark M. Spiegel, Vice President, Federal Reserve Bank of San Francisco Opening Remarks .............................................. 9 Emerging Asia in Transition Stanley Fischer, Vice Chairman, Board of Governors of the Federal Reserve System GENERAL DISCUSSION ......................................... 21 Monetary Policy “Contagion” in the Pacific Basin: A Historical Inquiry ............................................ 25 Sebastian Edwards, Professor, University of California, Los Angeles COMMENTARY Woon Gyu Choi, Deputy Governor, Bank of Korea..................... 57 Linda Tesar, Professor, University of Michigan ....................... 65 GENERAL DISCUSSION ......................................... 71 Is There Macroprudential Policy without International Cooperation? ............................. 79 Stephen G. Cecchetti, Professor, Brandeis University Paul M.W. Tucker, Senior Fellow, Harvard University COMMENTARY Linda S. Goldberg, Vice President, Federal Reserve Bank of New York ..... 111 Fabio Ghironi, Professor, University of Washington; and Lawrence Schembri, Bank of Canada.............................. 115 GENERAL DISCUSSION ......................................... 123 Evening Keynote Address ....................................... 129 Freer Choice, Lower Growth, and Higher Welfare: Recent Changes in China’s Population Control Policy and the Impact on Its Economy Shang-Jin Wei, Chief Economist, Asia Development Bank GENERAL DISCUSSION ......................................... 147 International Coordination ..................................... 149 Jeffrey Frankel, Professor, Harvard University COMMENTARY Charles Engel, Professor, University of Wisconsin, Madison ............. 187 J. Aizenman, Professor, University of Southern California............... 195 GENERAL DISCUSSION ......................................... 201 The Renminbi’s Ascendance in International Finance . 207 Eswar S. Prasad, Professor, Cornell University, and Senior Fellow, Brookings Institution COMMENTARY Menzie Chinn, Professor, University of Wisconsin, Madison ............. 257 Stijn Claessens, Senior Adviser, Board of Governors of the Federal Reserve System .......... 265 GENERAL DISCUSSION ......................................... 273 Policy Perspectives from the Bottom Up: What Do Firm-Level Data Tell Us China Needs to Do? ............. 281 Loren Brandt, Professor, University of Toronto COMMENTARY David Dollar, Senior Fellow, Brookings Institution .................... 303 Tao Zha, Executive Director, Federal Reserve Bank of Atlanta ............ 309 GENERAL DISCUSSION ......................................... 315 Policymaker Panel ............................................. 321 Monetary Policies in a Diverging Global Economy: Japan, the United States, and the Asia-Pacific Region.............. 323 Sayuri Shirai, Member, Monetary Policy Board, Bank of Japan Safeguarding Financial Stability in a Diverging Global Economy ..... 339 Joon-Ho Hahm, Member, Monetary Policy Board, Bank of Korea Indonesia: Global Spillover and Policy Response .................. 349 Perry Warjiyo, Deputy Governor, Bank Indonesia GENERAL DISCUSSION ......................................... 371 Closing Remarks ............................................... 377 Barry Eichengreen, Professor, University of California, Berkeley Evening Keynote Address ....................................... 383 The World Economy after the Global Financial Crisis Maurice Obstfeld, Economic Counselor and Director of Research, International Monetary Fund GENERAL DISCUSSION ......................................... 395 CONTRIBUTORS .................................................. 399 CONFERENCE PARTICIPANTS ....................................... 415 1 Foreword The 2015 Asia Economic Policy Conference, titled “Policy Challenges in a Diverging Global Economy,” continues the series that the Federal Reserve Bank of San Francisco began in 2009 and holds every other year. This series is the flagship event of our Center for Pacific Basin Studies, bringing together researchers, private market participants, and policymakers to explore Asia’s evolving role in the global economy. These conferences build on the Bank’s long-standing tradition of focusing on Asian developments. They help provide the deep understanding of Asian econ- omies that is very important to the Federal Reserve Bank of San Francisco. Knowledge of the region is important for formulating monetary policy, pro- moting the stability of global financial markets, and executing our responsi- bilities in banking supervision. The conference also affords us the ability to informally discuss global economic issues with policymakers from Asia and the rest of the world. As the Federal Reserve pursues policy normalization, communication with other monetary officials is particularly useful. The program at this year’s conference focused on the many challenges faced by policymakers in advanced and emerging countries in the global economy. Among the issues addressed are what will be the impact of U.S. policy nor- malization on emerging markets, what is the desirability and feasibility of international policy coordination, and what are the prospects for China’s con- tinued economic growth and currency internationalization. I appreciate the contributions of all those who took part in the conference, including authors, discussants, panelists, and audience members. My special thanks to Reuven Glick, Zheng Liu, Fernanda Nechio, and Mark Spiegel for organizing the proceedings, to Sokha Um for handling all of the conference logistics, to Reuven Glick and Mark Spiegel for editing the proceedings, and to Anita Todd for her assistance with the production of this volume. John C. Williams President and CEO, Federal Reserve Bank of San Francisco 2 ASIA ECONOMIC POLICY CONFERENCE POLICY CHALLENGES IN A DIVERGING GLOBAL ECONOMY 3 Policy Challenges in a Diverging Global Economy: Conference Summary Reuven Glick and Mark M. Spiegel The Federal Reserve Bank of San Francisco’s Center for Pacific Basin Stud- ies held the fourth in its biennial Asia Economic Policy Conference (AEPC) series with a program on “Policy Challenges in a Diverging Global Economy” on November 19–20, 2015. The program focused on the challenges faced by policymakers in advanced and emerging economies as the U.S. economy con- tinues to strengthen and the Federal Reserve pursues policy normalization by raising its policy rate. Participants considered many questions, such as what will be the impact of U.S. policy normalization on emerging markets? What is the desirability and feasibility of international policy coordination? And what are the prospects for China’s continued economic growth and currency inter- nationalization? To explore these issues and others, the conference brought together experts from around the world and commissioned papers and other presentations by distinguished speakers. This chapter briefly summarizes the papers presented. In opening remarks on “Emerging Asia in Transition,” Vice Chairman Stanley Fischer of the Federal Reserve Board of Governors observes that, after a long period of rapid economic growth, Asia’s emerging economies, including China, appear to have entered a transitional phase of slower growth. He pro- vides four reasons for this growth slowdown. First, emerging Asia has been negatively affected by slow demand growth elsewhere, particularly in advanced economies. Second, economies generally decelerate as they develop, a pattern already seen in many of Asia’s growth pioneers, such as Japan and Korea. Third, the tremendous growth of trade in the region, driven by the process of global integration and expansion of production-sharing networks, may be flattening. Lastly, demographic aging and slower labor force growth across the region is dampening growth. The transition to slower growth in emerging Asian econ- omies, as well as a shift toward domestic demand and consumption and away from external demand and investment in the region, is likely to have significant implications for the global economy. 4 ASIA ECONOMIC POLICY CONFERENCE POLICY CHALLENGES IN A DIVERGING GLOBAL ECONOMY In “Monetary Policy ‘Contagion’ in the Pacific Basin: A Historical Inquiry,” Sebastian Edwards of the University of California at Los Angeles examines the extent to which Federal Reserve actions have affected monetary policy in emerging markets in the past. In particular, he analyzes the impact of U.S. interest rate changes on policy rates in
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