Transcript of Economic Forum -- One World, One Currency: Destination or Delusion? November 8, 2000

IMF News, November 8, 2000

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Transcript of Economic Forum -- One World, One Currency: Destination or Delusion? November 8, 2000

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Bibliographic details

• Published: November 8, 2000

Event, agenda, and participants

• Date: November 8, 2000
• Forum format: each speaker invited to speak for 15 to 20 minutes; general discussion and audience Q&A followed
• Panelists and roles:
  • Alexander Swoboda — Moderator, Senior Policy Advisor, IMF Research Department
  • Maurice Obstfeld — Professor of Economics, University of California at Berkeley
  • Paul Masson — Senior Advisor, IMF Research Department
  • Robert Mundell — 1999 Nobel Laureate and Professor of Economics, Columbia University (arrived late; remarks delivered)
• Context highlighted: creation of the euro (11 legacy currencies at launch) as motivating the forum

Optimal currency area (OCA) framework and theoretical findings

• Mundell’s OCA tradeoff: benefits of a single currency (reduced transaction costs, reduced uncertainty, network externalities) versus loss of exchange rate-based adjustment to idiosyncratic shocks
• Key theoretical extensions and considerations raised:
  • McKinnon (1963) insight: highly open economies with flexible wages/prices already have limited monetary autonomy
  • Endogeneity considerations (Krugman): currency union may increase regional specialization and economies of scale, potentially increasing vulnerability to region-specific shocks
  • Capital mobility effects:
  • FDI-style capital mobility can exacerbate a region-specific negative shock via capital outflows (Corden)
  • Other capital flows and asset-market completeness can provide international risk-sharing that reduces the need for exchange rate adjustments
  • Labor mobility: emphasized as central to internal adjustment in large currency unions (U.S. example)
  • Fiscal federalism: public fiscal transfers can substitute for incomplete private asset-market risk-sharing (Kenen, Masson)

Empirical observations and debate about trade and transaction-cost gains

• Empirical claims cited:
  • Study evidence that two Canadian provinces may trade as much as 20 times as much as a Canadian province with a U.S. state, controlling for other factors
  • Andy Rose's finding that two countries in a currency union trade three times more than two otherwise similar countries that do not share a currency
• Panel reactions:
  • Obstfeld and Masson urge caution: some of the measured large effects may be driven by very small countries in the samples; potential omitted variables (common language, regulations) may explain much of the observed trade premium

Euro experience and within-union divergence

• Euro cited as a live case where single monetary policy may not fit all members:
  • Within the euro zone, inflation and output outcomes have diverged since the euro launch
  • Specific example: Ireland’s inflation "edging 4 percentage points above the average of the three lowest" (relative to Maastricht criteria); Portugal and Spain "heading up to the limit point"
• European benefits noted:
  • Credibility from fixed exchange rates has reduced speculative intra-European capital movements
  • Creation of a deeper, larger European capital market
• Political constraints and accountability concerns: Danish "No" vote and UK political hesitancy (Blair Government views) illustrate political limits to deeper monetary union

Credibility, pegging, currency boards, and dollarization

• Credibility/importing low inflation: a late-20th-century rationale for pegging or adopting another currency
• Country-level choices illustrated:
  • Argentina’s currency board/dollar link provided credibility but limited policy flexibility and exposed Argentina to idiosyncratic shocks
  • Mexico’s 1954–1976 fixed exchange rate episode described as a period during which Mexico “had the rate of inflation of the United States” (22 years)
• Currency boards and IMF interaction:
  • Mundell expressed disappointment with IMF stance toward currency boards and argued currency board-style arrangements are analogous to classical gold-standard discipline
  • IMF policy tools (money-base targeting) criticized in the Indonesian context as potentially inappropriate for countries beyond hyperinflation episodes

Technology, globalization, and changing roles of money (Masson)

• National roles of money: means of payment, store of value, unit of account
• International roles of money: invoicing, denominating assets/liabilities, reserves, vehicle for FX transactions, anchor for other countries’ monetary policies
• Technological and financial changes noted:
  • Multinationals report in multiple currencies; currency swaps and derivatives transform denomination and hedge risk
  • E-banking/internet payments may enable cross-border payments outside traditional banking rails
  • Prices potentially quoted in multiple currencies with continuous updates
  • Clearing and settlement increasingly run by private institutions; central bank balances may be less central to daily settlement
• Implications:
  • Payments increasingly beyond direct central bank control
  • Greater scope for competing moneys and private choice of currency (network externalities may favor dominant currencies)
  • Reduced scope for monetary independence may make countries more willing to give up national currencies if a dominant currency offers purchasing-power stability
  • Countervailing force: national/regional currencies remain potent symbols of sovereignty; separation of money roles may facilitate coexistence of multiple currencies within a jurisdiction

Scenarios for global monetary arrangements and Mundell’s proposals

• Short- to medium-term scenario (Obstfeld / Masson):
  • Smaller countries may choose currency board, euro-ization, or dollarization
  • Larger countries may continue to float
  • Major currency areas (dollar zone, euro zone, yen zone) coexist with occasional coordination or intervention
• Mundell’s multi-step proposal for large-currency-area coordination:
  • Focus on currency areas (zones of fixed exchange rates) rather than literal single world currency
  • Possible anchors:
  • Gold (requires institutional stabilization authority)
  • Indexed SDR (virtual common currency)
  • Dominant currencies/major powers coordinating (G-3: dollar, euro, yen)
  • Specific Mundell suggestion:
  • Lock exchange rates among the three largest currency areas (U.S. dollar area GDP "$10 trillion"; euro area GDP "$7 trillion"; yen area GDP "$5 trillion")
  • Form a pooling/coordination body (open market committee equivalent) to set common monetary policy and a common inflation target
  • Eventually mesh this G-3 coordination with an SDR-based or broader international unit of account
  • Political feasibility caveats:
  • U.S. likely initially resistant to conceding monetary sovereignty
  • Political will is central—EMU arose in part from political stimulus (German unification cited)

Regional considerations and development contexts

• Africa: historical interest in a common African currency area noted (Mundell); practical anchor problem highlighted—no dominant African economy; a G-3-basket anchor or SDR-like anchor would be required
• Asia: political and structural constraints on emergence of a regional currency bloc:
  • Japan is large now but China may overtake it; renminbi needs convertibility and modern financial infrastructure before it could play a regional anchor role
• Latin America: examples show trade integration can be strong without currency union (Canada and Mexico with the U.S. as examples)

Policy recommendations and implications raised by speakers

• When forming a currency area (lessons from Europe):
  • Establish a common target for monetary policy (e.g., inflation target) and a harmonized measure of inflation (EUROSTAT/HICP analogue)
  • Lock exchange rates and create a unified decision-making authority for monetary policy
  • Negotiate seigniorage-sharing arrangements
• For countries considering pegging, currency boards, or dollarization:
  • Consider tradeoffs between credibility gains and loss of monetary adjustment instrument
  • Recognize role of capital mobility and type of capital flows in determining benefits and risks
  • Use IMF and international facilities to address temporary, reversible shocks that fixed regimes may otherwise aggravate (panel debate about IMF readiness and policy prescriptions)
• For the international community:
  • Explore incremental, politically feasible steps toward greater coordination among major currency areas (e.g., G-3 coordination, indexed SDRs)
  • Monitor technological change that may reduce the centrality of state-issued currency and expand private choice of currency

Key figures and exact phrasings preserved from the proceedings

• Speaker time allocation: "15 to 20 minutes"
• Expected late arrival: "20 to 30 minutes" (Mundell initially expected)
• Euro launch context: "11 national currencies" converted into single euro currency area at inception
• Historical Mexican peg period: "1954 until 1976" (22 years)
• Trade elasticity/empirical claims:
  • Canadian provinces vs. U.S. states: "20 times as much"
  • Andy Rose result: currency union pairs trade "three times more" than otherwise similar country pairs
• GDP figures cited for major currency areas: "$10 trillion" (U.S. dollar area), "$7 trillion" (euro area), "$5 trillion" (yen area)
• Inflation divergence example: Ireland "edging 4 percentage points above the average of the three lowest"
• Numeric pricing examples Mundell used illustratively: "100 yen equals a dollar" and "one euro equals a dollar"

Transcript of Economic Forum -- One World, One Currency: Destination or Delusion? November 8, 2000 (IMF).

References

• Argentina and the IMF
• Brazil and the IMF
• Canada and the IMF
• Germany and the IMF
• France and the IMF
• Indonesia and the IMF
• Japan and the IMF
• Luxembourg and the IMF
• Mexico and the IMF
• United States and the IMF
• Gold in the IMF -- A Factsheet
• Special Drawing Rights (SDRs) -- A Factsheet
• Transcripts
• PRESS CENTER
• https://www.imf.org/en/home