Archive for August 8th, 2009

Back to global imbalances?

August 8, 2009

RBI Governor has expressed that fixing growing imbalances is the key lesson of this crisis. 

World Bank econs, Sergio Schmukler and Luis Servén explore this issue in a research  note. Their summary:

To the extent that the United States is expected to outperform other major industrial countries in the medium term, it might continue receiving foreign capital and the previous pattern of global imbalances might be gradually restored, at least in part.

In that case, and in a similar fashion as pre-crisis capital inflows to the United States led to an exuberant expansion of the real estate sector, an appreciation in other (old or new) U.S. risky assets, may well develop.

However, the post-crisis real and financial adjustments suggest that the previous distribution of large imbalances will be difficult to restore and even more difficult to sustain over the long run. Thus, it would be unwise to dismiss the prospects of an eventual major depreciation of the U.S. dollar against different currencies around the world and of a correspondingly much higher diversification of emerging market holdings into non-U.S. assets.

 

Looking at the Financial Channel of global crisis more closely

August 8, 2009

The US originated crisis impacted the globe via its two channels – trade and finance (RBI has added a third channel as well- confidence).

I came across this useful short paperby NY Fed econs Nicola Cetorelli and Linda Goldberg which look at how the channel has impacted emerging economies in this crisis.

As banking has become more globalized, so too have the consequences of shocks originating in home and host markets. Global banks can provide liquidity and risk-sharing opportunities to the host market in the event of adverse host-country shocks, but they can also have profound effects across international markets. Indeed, global banks played a significant role in the transmission of the current crisis to emerging-market economies. Flows between global banks and emerging markets include both cross-border lending, which has long been recognized as responding significantly to shocks at home or abroad, and internal capital-market lending, which is the internal flow of funds within a banking organization (such as between a headquarters and its offices in foreign locations).

Adverse liquidity shocks to developed-country banking, such as those that occurred in the United States in 2007 and 2008, have reduced lending in local markets through contractions in cross-border lending to banks and private agents and also through contractions in parent banks’ support of foreign affiliates. Because all these forms of transmission impinge on the lending channel in recipient markets, the ownership structure of emerging-market banks does not by itself provide sufficient basis for identifying the degree of shock transmission from abroad.

They add the problem is not really in having big global banks as they are useful even in stressful times. It was only because the crisis just got really worse, even they could not arrange funds within their global branch networks. Instead, the monetary policymakers  need to think beyond domestic borders as the impact is felt globally.


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