This article lays it all out ~ **UN Proposes New Multilateral Regime to stave off currency speculation ... * 24 February 2011 Visions and Prospects for East Asian Economic Integration - UNCTAD Free Trade and Regional Blocs ~ Global Korea 2011: East Asia in the World - Prospects and Challenges
September 2, 2011
Next week, on Monday 5 September at 11 a.m. in Room III, UNCTAD would give a press conference to present the 2011 Trade and Development Report on “Post-Crisis Policy Challenges in the World Economy”.
Participating would be UNCTAD Secretary-General Supachai Panitchpakdi and Heiner Flassbeck, the Director of the UNCTAD Division for Globalization and Development Strategies.
The report was under embargo until Tuesday, 6 September at 5 p.m. GMT.
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E. A multilateral approach to global exchange rate management
The preceding sections, based on historical and theoretical considerations, laid out the guiding principles for a global multilateral financial framework. A set of basic principles derived from the analysis above would make a practical implementation of the core ideas feasible and could provide monetary and financial stability to all participating countries while restoring the conditions for Schumpeterian innovation.
To achieve this, a multilateral monetary framework would be based on rather free movement of capital and would be governed by strong global institutions. To ensure the functioning and the efficiency of such a framework, the following principles need to be applied
Stable real exchange rates:
�� The real exchange rate is kept constant among a group of countries (one region or more).
Fundamental and long lasting trade imbalances are prevented since all participating countries maintain their level of competitiveness.
�� Real exchange rates are normally kept constant by way of setting labour market institutions that allow steering nominal wages in a way that reflects productivity increases and the growth rate of inflation in each country.
�� If nominal wages fail to adjust or if inflation targets diverge, nominal exchange rates need to be adjusted to exactly compensate the emerging gap in competitiveness.
Avoid currency speculation – interest rate parity:
Continues ..
�� To avoid large speculation gains in currency markets, nominal exchange rates need to adjust to changes in interest rate levels of countries along the interest parity condition (relative UIP developments).
�� Even if inflation rates do not converge over time, the reflection of relative PPP in exchange rates on a regular basis (monthly or quarterly) will remove most of the incentives for short term speculation in currencies.
Enduring symmetric response:
�� As unilaterally pegged exchange rate arrangements and floating are prone to speculative attacks, an international financial system designed to minimize speculative attacks needs to be built on a symmetric responsibility that commits interventions to be carried out by the central banks of both the depreciating and the appreciating currencies if an exchange rate comes under unjustified attack.
�� The country with an appreciating currency has unlimited intervention potential (since the means can be printed and the result of foreign exchange market interventions on the domestic money market can normally be sterilized). In this case the need to hold foreign exchange reserves to “insure” against depreciation pressures is minimal for all individual countries.
�� Symmetric response also means that cost and profits of intervention will be equally shared.
For instance, the central bank of the appreciating currency will incur a valuation loss of its foreign exchange reserves in its own currency, while the central bank of the depreciating currency will make a valuation profit of its exchange reserves in its own currency. Likewise, cost of sterilization may incur on one side that need to be shared with the partner central banks.
Multilateral code of conduct:
�� The code of conduct needs to reflect the new sprit of multilateralism in global economicgovernance based on the need to balance the advantages of one country against thedisadvantages of other directly or indirectly affected countries.
�� The code of conduct ends the competition of nations. It is not countries that should competewith each other but companies on a level playing field.
Global organization of the system:
�� The present Bretton Woods institutions have to be fundamentally redesigned or a new global institution with supervisory and advisory powers has to be created and has to practicallymanage the new financial system.
�� Lead currencies have to be found (“planets”); given the economic power shift away from a singular economic leader in the post-war financial system, several lead currencies (existing or artificial) should be envisaged in today’s multi-polar economic system (figure 4.4).
The authority managing a multilateral exchange rate system needs to assume a series of fundamental responsibilities to ensure its efficient functioning through rules that keep the real exchange rate stable.
An international monetary authority would need a mandate to enforce such regulations, including through adjustments to members’ nominal exchange rates. The surveillance function needs to be complemented by an enforcement capacity so as to be able to implement binding commitments for necessary adjustments within the system. The authority also has to assume the roleof a lender of last resort so as to supply liquidity to the system’s members in case of crisis. A common currency unit could be envisaged under its surveillance, the seignorage of which would be sharedamong all members.
To efficiently face stress in the financial and exchange rate system the managing authority will have to assign tasks and responsibilities in a symmetric fashion, i.e. through the involvement of the depreciating and the appreciating currencies. At the same time, the institution will ensure that costs and profits of symmetric interventions are shared among all parties concerned.
Finally, the governing institution of the new exchange rate system would act as the highest authorityfor the establishment and monitoring of a true global financial multilateralism
F. Conclusion
In the second half of 2008 the sharp devaluation of the Icelandic krona (51 per cent against the United States dollar) has been followed by a larger wave of currency depreciations, such as of theHungarian forint (34 per cent), the South African rand (38 per cent), the Brazilian real (34 per cent),the Turkish lira (33 per cent), the Mexican peso (29 per cent) and the Chilean peso (28 per cent).
Many others are likely to follow in 2009, for instance in Eastern Europe, where the pressure on currency markets has been ever-increasing over recent months. Countries like Estonia, Lithuania,Rumania and Bulgaria are under rising distress and the region as a whole is now under serious dangerof economic meltdown.
But the combination of huge current-account and budget deficits, devaluation pressures, sometimes pegged exchange rates and diminishing foreign exchange reserves lead to the same old policy prescriptions of austerity again and again. It is high time to act and break this vicious cycle.
Countercyclical macroeconomic policies – enabled and supported by a global multilateral financial framework – are urgently needed.
The bold departure proposed here is needed not only to counter the adverse effects of the current global financial crisis, but also to prevent similar crises in the future. It is clear that vulnerable countries in crisis do not need assistance packages that oblige them to fiscal austerity and restrictive monetary policy measures.
Just as the advanced economies need expansive monetary policy and fiscal stimulus to break the negative feedback of the financial crisis on economic activity, so do developing countries, transition economies and emerging markets. They all need a combination of financial stabilization with expansive monetary and fiscal polices. In the absence of such a policy mix more and more countries will quickly end up on the verge of collapse.
FULL PDF File @ http://www.unctad.org/en/docs/gds20091_en.pdf
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