Global Imbalances, Exchange Rate Pegs and Capital Flows A Closer Look
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 soc...
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| Format: | eBook |
| Language: | English |
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Paris
OECD Publishing
2011
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| Series: | OECD Economics Department Working Papers
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| Collection: | OECD Books and Papers - Collection details see MPG.ReNa |
| Summary: | 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 |
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| Physical Description: | 15 p. 21 x 29.7cm |