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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
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Global Imbalances, Exchange Rate Pegs and Capital Flows
A Closer Look
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- Paul van den Noord
- 08 avr 2011
- Bibliographic information
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.
- capital flows, exchange rates, global imbalances
- Classification JEL:
- E52: Macroeconomics and Monetary Economics / Monetary Policy, Central Banking, and the Supply of Money and Credit / Monetary Policy
- F31: International Economics / International Finance / Foreign Exchange
- F59: International Economics / International Relations, National Security, and International Political Economy / Other