Peterson Institute for International Economics Update Newsletter
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PIIE Update Newsletter
May 9, 2012

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  New Book
Who Needs to Open the Capital Account?

Olivier Jeanne, Arvind Subramanian, and John Williamson
  Who Needs to Open the Capital Account? In their new book, Who Needs to Open the Capital Account?, Olivier Jeanne, Arvind Subramanian, and John Williamson revisit the question of how developing and emerging-market economies integrate into global financial markets. Twenty years after the rise of emerging-market finance there remains a wide diversity of approaches to capital account policies. Some emerging-market economies maintain a completely open capital account. Others, most notably Brazil, have experimented more actively with market-based prudential capital controls since the crisis. And still other countries, such as China, maintain tight restrictions on their capital accounts.

The authors argue that this diversity of policies is consistent with the lack of strong evidence for or against the benefits of capital account liberalization. They show that free capital mobility seems to have little impact on economic development (although there is some evidence that foreign direct investment and stock market liberalization may, at least temporarily, raise growth). Furthermore, economists now understand better the welfare benefits of prudential capital controls of the type that Brazil is using to curb the boom-bust cycle in capital flows.

This being said, Jeanne, Subramanian, and Williamson find the status quo—in which there is no international rule or discipline for capital account policies—problematic. Thus, the authors see a need for an international regime that would legitimize the use of capital account policies that are appropriate and discourage the use of those that are not.

The book sets out the desirable features of an international norm for capital account policies. As for trade in goods, if there are controls, Jeanne, Subramanian, and Williamson would be strongly in favor of having transparent, price-based measures, such as a countercyclical tax on certain types of capital flows. The international community could agree on a ceiling on the tax rate to ensure that the harmful effects of controls (if any) would be limited. The new rules could be embodied in an international code of good practices developed under the auspices of the International Monetary Fund.

>> Preview and purchase online

  Policy Brief 12-8
Does Monetary Cooperation or Confrontation Lead to Successful Fiscal Consolidation?

Tomas Hellebrandt, Adam S. Posen, and Marilyne Tolle
  Adam S. Posen Active accommodation of fiscal consolidations by monetary policy is controversial, as can be seen in current euro area discussions. While many observers acknowledge that there is usually a place for monetary accommodation in response to fiscal consolidation, a sequencing argument is often heard today that fiscal commitment must precede any loosening. Some analysts go further to suggest that toughness by central banks taking a hard line on adjustment is critical to inducing sustained fiscal stabilization. This policy brief looks at the recent historical record of central bank behavior vis-à-vis fiscal authorities, at least until the current crisis period, and whether accommodative approaches ahead of consolidations have proven dangerous or helpful. The authors also try to assess the market credibility of fiscal consolidations as a function of the central banks' monetary stance prior to fiscal consolidation. They find clear evidence of positive associations between the degree of monetary ease in advance of fiscal consolidation programs and both those programs' success and their market credibility.

>> Read full policy brief [pdf]

  Policy Brief 12-11
Will the World Trade Organization Enjoy a Bright Future?

Gary Clyde Hufbauer and Jeffrey J. Schott
  The Doha Round is not the first multilateral negotiation to collapse under the weight of substantive disputes and tactical blunders, but revival this time requires a greater miracle than in the darkest days of the Tokyo or Uruguay Rounds. After near-death moments, those talks concluded with a big red bow tied around a comprehensive package. Ministers went home comforted that the next big negotiation would commence well after they left office. This time is different. There will be no red bow unless the Doha package is firmly joined to an immediate follow up round of talks—conducted under entirely different rules—both on old subjects that were badly neglected in the Round and urgent new subjects that have surfaced since the Round was launched in 2001.

Hufbauer and Schott propose a "grand bargain" that couples a significant harvest from the Doha agenda with the future negotiation of plurilateral agreements among WTO members willing to take rewarding, yet challenging, steps forward. The harvest should start—but not stop—with agreements that create minimal commercial pain for any member but deliver widespread gains: trade facilitation, duty-free, quota-free treatment of imports from least developed countries, phaseout of agricultural export subsidies, discipline of farm export controls, and reforms to dispute settlement. The harvest should then move to harder parts of the Doha Round—agreements that deliver significant benefits to some members but cause noticeable pain in others. The other side of the grand bargain is approval from the WTO membership for like-minded countries to negotiate deals between themselves. Five topics should be served up for plurilateral talks, as part of a grand bargain commencing in 2013: services liberalization, currency undervaluation, climate and energy, zero-for-zero tariffs coupled with disciplines on nontariff barriers, and state-owned enterprises.

>> Read full policy brief [pdf]

Mexico-Mercosur Auto Moves Send Mixed Signals

Barbara Kotschwar
  Barbara Kotschwar Mexico's recent concession to Brazil to limit its auto exports to that country has prompted Argentina to threaten to pull out of its own trade agreement with Mexico. Brazil's pressure on Mexico and Argentina's threat are motivated by a turnaround in the trade flows: With their currencies appreciating against the dollar, their former trade surpluses with Mexico have turned into deficits. The renegotiation—and threatened withdrawal—from this agreement are worrying, particularly if this signifies a trend in regional trade policy. Argentina is sending a warning signal to the markets, and Mexico, by renegotiating with Brazil, has sent a mixed signal to the markets about its commitment to international economic terms of engagement.

>> Read full interview

Peterson Perspectives Interviews

audio  Elections in Greece, Part II: Will Greeks Also Say 'No' to the Euro Area?
Jacob Funk Kirkegaard says that if Greeks confront the consequences of leaving the euro area, they will very likely balk and accept their bailout terms.

audio  Elections in Greece, Part I: Greek Voters Say 'No' to Their Bailout
Jacob Funk Kirkegaard suggests that after the principal Greek parties fail to form a governing coalition, new elections will be needed to clear the air.

audio  Elections in France: Major Shifts Unlikely
Nicolas Véron argues that François Hollande has no plans and no mandate to shift policies dramatically toward austerity, Germany, or Europe.

audio  Toward a European Fiscal Union, Part II
C. Randall Henning explains why Spain illustrates the shortcomings and opportunities for resolving the European economic and financial crisis.

audio  Toward a European Fiscal Union, Part I
C. Randall Henning illuminates the lessons that Europe can learn from the United States in forming a unified fiscal and banking governance.

audio  Ominous Job Trends in the US Economy
Howard F. Rosen discusses his latest research showing that jobs being added in the United States pay less on average than the jobs lost in the Great Recession.

audio  US-China II: Limited Progress
Nicholas R. Lardy says that with leadership changes in the offing in Beijing and Washington, the two sides will be satisfied with incremental gains.

audio  US-China I: Will A Dissident's Escape Disrupt It?
Nicholas R. Lardy says that China and the Obama Administration seem successful in trying to prevent a blowup over Chen Guangcheng.

Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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How to Save Corporate Tax Reform: Stop Exaggerating the Revenue Cost

Are Europeans Turning Against Austerity?

Why the World Should Care about the European Debate on Bank Capital Requirements

Elections in France: An Eerie Stability

Why Europe Needs Austerity—It's Not Why You Think
  Can China Reflate the Housing Market?

Wen Jiabao Has the Wrong Solution for China's Banks

Are Chinese Banks Too Profitable?

China's Economic Outlook in 2020 and Beyond

The Challenges of Renminbi Internationalization
  Radio Free Asia's Korea Service

Slave to the Blog: Special Border Edition

World Grain Prices

Skrillex vs. LMFAO

The Slow Boat to Incheon

PIIE Noted in the News and on the Web

Money Magazine
Posen: Millions of Europeans Face Long Slog
Money Magazine highlights Adam S. Posen in its "Game Changers" interview series.

The Fine Art of Squeezing: Britain vs America
Adam S. Posen explains that the US economy is growing faster than the UK's because of greater corporate investment and consumer spending, among other reasons, and not due to a commitment to austerity.

NPR Morning Edition
Bond Market Shrugs Off France's Presidential Vote
Jacob Funk Kirkegaard discusses how the bond market correctly perceived that the president-elect is not going to embark on some huge stimulus program in France.

NPR All Things Considered
Investors Flee Spain as Economy Spirals Downward
Jacob Funk Kirkegaard discusses Spain falling back into recession and the fact that the country's unemployment rate is the highest in Europe.

Yahoo! Finance | The Daily Ticker
France’s Hollande Is "Bluffing" But Greek Vote Raises Real Concern: Kirkegaard
Jacob Funk Kirkegaard discusses how the French and Greek elections could affect the euro area crisis.

Euro Zone Could Face Recession
Jacob Funk Kirkegaard explains that the euro area could face a prolonged period of low growth, if not outright recession.

New York Times
China Curbs on Currency Still an Issue
William R. Cline and Nicholas R. Lardy weigh in on the roles Chen Guangcheng and China's currency will play in the ongoing US-China Strategic and Economic Dialogue in Beijing.

China Radio International
The Fourth China-US Strategic and Economic Dialogue
Nicholas R. Lardy discusses the role of China's currency in the world economy and other topics on the agenda for the China-US Strategic and Economic Dialogue. Xiao Geng of the Fung Global Institute is also interviewed in this program.

Preview of Our Next Issue

Working Paper
Networks, Trust, and Trade: The Microeconomics of China-North Korea Integration
Stephan Haggard and Marcus Noland

In This Issue

Martin Wolf Why the Eurozone Crisis is Not Over

Martin Wolf of the Financial Times says the euro area crisis has barely begun and could take a full decade to resolve.

Featured Book
Title Resolving the European Debt Crisis

William R. Cline
Guntram B. Wolff

Economic Sanctions
Post-2000 Sanctions Episodes [pdf]

As an update to the seminal study Economic Sanctions Reconsidered (2007), Gary Clyde Hufbauer, Jeffrey J. Schott, Kimberly Ann Elliott, and Julia Muir provide a new table of all post-2000 economic sanctions episodes. [pdf]

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