Reserve Currencies and International Finance

Transcription

1 and International Finance Matteo New York University, Stern School of Business, NBER, CEPR IES Fellow, Princeton University CEPR-CIFRA Micro Foundations of Macro Finance June 9, 2013

2 Guidelines for discussion What is a reserve currency? Why does it matter? Empirical Evidence What we know What we would like to know Existing Theoretical Models Search Frictions and Coordination Macro Finance Models DSGE Models: portfolios approximations Open Questions: Goods Market Vs Financial Market New models of exchange rates Whose demand? Why? Which Frictions? Modeling choices is it risk? It s all about portfolios... and the steady state stationarity

3 The Wikipedia View First result of google search for reserve currency? Not my paper...but actually: http : //en.wikipedia.org/wiki/reserve currency Definition: A reserve currency is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves Why held? The top reserve currency is generally selected by the banking community for the strength and stability of the economy in which it is used Why does it matter? This permits the issuing country to purchase the commodities at a marginally lower rate than other nations, which must pay a transaction cost. For major currencies, this transaction cost is negligible The US dollar is said to have reserve-currency status, making it somewhat easier for the United States to run higher trade deficits. Central bank reserves held in dollar-denominated debt, however, are small compared to private holdings of such debt. In the event that such holders of dollar-denominated assets decided to shift holdings, there could be serious consequences for the US economy.

4 The Wikipedia View: To Sum Up To sum up the Wiki-view, the reserve currency: large component of international portfolios demanded by banks because of its strength and stability might have benefits for US: trade deficit could have costs for US (World): financial meltdown How much of the wiki-view do we truly understand? Relatively little... Some of my talk will be about what we understand; Mostly about what we do not understand

5 International Monetary System: Role of the US Architecture characterized by key country: US post-wwii, UK pre-wwi Key country: deep financial markets, particularly funding markets Empirical literature: special role of the US Fact 1: Net Foreign Assets (NFA): riskier assets than liabilities Fact 2: Able to finance long-term trade deficits Fact 3: Transfers wealth to the rest of the world (RoW) during global crises Fact 4: US dollar reserve currency, safety premium See: Gourinchas and Rey (2007a,b), Lane and Milesi-Ferretti (2007), Lane and Shambaugh (2010), (2010,2012)

6 Fact 1: Riskier Assets and Safer Liabilities Figure : US External Balance Sheet: Year-End 2007 Assets Liabilities Assets held abroad by US residents Equity $5.2tr FDI $3.6tr Derivatives $2.6tr Debt $6.8tr Equity $3.2tr FDI $2.3tr Derivatives $2.5tr Debt $12.1tr Assets held in the US by RoW residents FX reserves $0.06tr NFA -$2.0tr Source: Balance of Payment Statistics

7 Fact 1 cont d: Assets in Foreign Currency and Liabilities in US Dollar (%) % Assets in Foreign Currency % Liabilities in US Dollar Source: Lane and Shambaugh (2010)

8 Facts 2-4 Fact 2: The US has run a trade deficit every year since The 2010 deficit was 3.4% of GDP Fact 3: In 2008 the US NFA deteriorated by $1.4tr: equivalent to a transfer of 10% of GDP to the RoW Fact 4: US dollar safety premium: the compensation an investor requires to hold foreign currency instead of US dollars On average: 1%-3% Rey and Gourinchas (2007); (2010); Lustig et al. (2010) During crises: around 10%, as high as 53% in Oct ( (2010))

9 Fact 4: The US Dollar Safety Premium Source: (2010)

10 What we would like to know Currency and Bond Portfolios: Who owns what? Official holdings, but also private holdings Official Owners Data somewhat better, but Private Owners certainly as important Data on international portfolios is coarse: which bonds? Currency trading and hedging Is there bond home bias? Which portfolios matter? Who is the marginal agent for currencies?

11 Search and Coordination Kiyotaki, Matsuyama, Matsui (1993): reserve currency emerges because of coordination in a search market for goods. Same as search foundations of demand for money in domestic macro Rey (2001): similar but stronger effects of financial size Some recent effort to apply to search for counterparties in financial markets Multiple equilibria and sun-spots are a pervasive phenomenon here

12 Macro-Finance Model The Exchange rate is linked to Marginal utility: U (C t+1 ) U (C t ) = U (Ct+1 ) e t+1 U (Ct ) e t Complete Vs Incomplete Markets Financial Markets pin down wealth and consumption Goods Markets pin down the exchange rate: home bias, transport cost

13 DSGE Models Linearize around deterministic steady state (DSS) In DSS portfolios are indeterminate Recursive higher order approximations (a form of Bifurcation Theorem) Potential Problems: Is the DSS of interest? Changes in market structure affect the SSS but not DSS