ECB Forum: Session 1: Macroeconomic and monetary challenges - 28 June 2016
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Cœuré, Benoît
Eichengreen, Barry
Calvo, Guillermo
Gourinchas, Pierre-Olivier
Rey, Hélène
Vines, David
Chair: Benoît Cœuré, Member of the Executive Board, European Central Bank Global monetary order: Barry Eichengreen, Professor, University of California at Berkeley Discussant: Guillermo Calvo, Professor, Columbia University Real interest rates, imbalances and the curse of regional safe asset providers at the zero lower bound: Pierre-Olivier Gourinchas, Professor, University of California at Berkeley; Hélène Rey, Professor, London Business School Discussant: David Vines, Professor, Oxford University
 Good morning and welcome to Cintra to the third ECB forum on central banking. After focusing on more domestic central banking issues in the first two editions of the conference, we have chosen an international context for this year's forum. The future of the international monetary and financial architecture, which is of great relevance given the cross-border interdependencies in which we operate. We look forward to rich and inspiring discussions as in the previous years. Let me just shortly clarify our media policy. All sessions are on the record and can be reported upon live. All conversations with forum participants taking place on the sidelines of the forum are strictly off the record. For those of you who wish to tweet, whether media or here in the audience, our Twitter account is at ECB forum and there is a hashtag, hashtag ECB forum Cintra. Let me now give the floor to President Draghi. President Draghi, in recent years central banks across advanced economies have been engaged in the same task, namely raising inflation and inflation expectations back to levels consistent with price stability. Each has faced conditions particular to its own jurisdiction. Each has deployed measures appropriate to its own context and each has acted to fulfill the mandate laid down in its own constitution. And yet, the fact that all central banks have faced a common challenge of low inflation is not coincidental. There are global factors at play and this begs the question, what is the best way for us to deal with them? At one extreme, central banks can take global conditions as entirely exogenous and set their policies accordingly. At the other extreme is explicit coordination of monetary policies. In between is a range of informal solutions. Whatever one's views on these options, what is clear is that the question of the international dimension of monetary policy is becoming more pertinent since the common factors affecting central banks are increasing. Indeed, a growing literature suggests that globalization has created a common factor in inflation developments which goes beyond fluctuations in energy or commodity prices. Higher import volumes have increased the importance of international prices and wages relative to domestic ones, making the global output gap more relevant. In that context, there are two types of factors that are significant for the global low inflation environment we face today. More cyclical factors that have put downward pressure on prices and more structural factors that have lowered the equilibrium real rate and slowed down the response of the economy to monetary policy. The first type of factors includes the large negative output gaps generated by the financial crisis and its after-month, which still averaged 1% amongst G7 economies today. This global slack has dampened in particular import and producer price inflation, both of which have been weak for several years among advanced economies. These set by producers in the euro area and those set by producers in trading partner countries are indeed highly correlated. Also, depressing global inflation has been the slump in demand for energy and commodities linked to the slowdown in emerging markets. This has fed not just into lower headline inflation but also into lower underlying inflation through its effects on costs and imported prices. Indeed, if one decomposes inflation for the average advanced economy, one finds that since mid-2014, there has been a notable rise in the global component linked largely to oil and commodity price falls. These various factors may originate only in parts of the global economy. Some originate more in advanced economies, other more in emerging markets. But in an integrated world, they have global effects. Cyclical weakness has spilled over through various channels into a similar challenge for all. The second type of factors is more structural in nature. They concern the global forces that have led to very low real equilibrium interest rates across advanced economies and hence made it more complicated for monetary policy everywhere to provide the appropriate boost to global demand given an effective lower bound on nominal interest rates. In particular, this has led many central banks in the advanced economies to engage in large scale unconventional policies. That low interest rate environment is a consequence of global excess of desired savings over planned investment which results from rising net savings as populations plan for retirement, from increased demand for and lower supply of safe assets, from relatively less public capital expenditure in the context of slow in population growth in advanced economies, from the secular shift from industries intensive in physical capital to those more intensive in human capital and from a slow down in productivity growth that reduces returns on investment. Again, those factors may not be distributed homogeneously across economies, but their effects are global because they propagate through global financial markets. With internationally mobile capital, the clearing interest rate that balance savings and investment is more a global concept than a local one. And accordingly, estimates of the equilibrium interest rate suggest that it is very low, possibly even negative in the Euro area, the US, and in other advanced economies. None of this means that central banks should give up on pursuing their domestic price stability mandates. We have demonstrated with our unconventional tools that it is possible to engineer accommodative financial conditions even when the equilibrium interest rate is low. And we have shown that this can be effective in supporting domestic demand and stocking domestic price pressures even when these inflationary headwinds are blowing from the global economy. But the global nature of low inflation does have two important implications. The first is that operating against persistent headwinds arising from abroad has forced central banks to deploy monetary policy with more intensity to deliver their mandates. And that in turn results in higher financial stability risks and spillovers to economic and financial conditions in other jurisdictions. Such spillovers are not necessarily all negative for the global economy. On the contrary, by securing economic and financial stability in their own jurisdictions, advanced economies also help stabilize other economies through trade and financial linkages. Empirical evidence suggests that the net spillover effect of the measures taken during the crisis has been positive, especially at times such as after the Lehman crash when countries have faced common global shocks. At the same time, monetary policy has inevitably created destabilizing spillovers as well, especially when business cycles have been less aligned. The large exchange rate fluctuations between major currencies and the pressures some emerging economies have experienced from capital flows are testament to that. This is not so much a result of the measures central bank have employed, but rather of the intensity with which they have had to be used. These negative spillovers have led to a revival of interest in the topic of monetary policy coordination. That formal monetary policy coordination is complex for well-known reasons. Central banks have national mandates, not global ones, and are accountable to their domestic parliament. This doesn't mean, however, that we cannot achieve a better global solution than we have today. We have seen, for instance, how divergent monetary policies among major central banks can create uncertainty about future policy intentions, which in turn leads to higher exchange rate volatility and risk premia. That then has to be countered with more expansionary monetary policy, increasing spillover effects for others. We also know that competitive devaluations are lose-lose for the global economy, since they lead only to greater market volatility to which other central banks are then forced to react to defend their domestic mandates. So we would all clearly benefit from an enhanced understanding among central banks on the relative paths of monetary policy. That comes down above all to improving communication over our reaction functions and policy frameworks. The global economy could also benefit from cooperation among spillover initiating and spillover receiving economies on how to mitigate unwanted side effects. One aspect that we need to understand better is how domestic monetary regimes affect the transmission of foreign monetary policy shocks. There has been a debate in recent years as to whether the famous trilemma of international macro has collapsed into dilemma, whereby floating exchange rates no longer guarantee autonomy for domestic monetary policy, and policy independence is only possible if capital flows are in fact managed. But there is also evidence that exchange rate regimes still matter. Various recent studies support the traditional view that exchange rate flexibility affords at least some degree of insulation from global shocks. Another aspect is understanding the role of domestic policies more broadly in mitigating negative spillovers. A large body of empirical work in recent years has shown that fiscal, macro prudential, regulatory and supervisory policies can help mitigate the adverse effects of foreign monetary policy on domestic financial stability. Indeed, the relatively recent experience with the so-called taper tantrum in 2013 showed how differences in domestic policy frameworks shaped how severely different economies were affected by financial spillovers. In other words, it has become clearer since the crisis that the famous Timbergen principle, which we apply at the domestic level, also needs to be applied at the global level. Policy makers need to have sufficient instruments to deliver on their objectives, and they do have them, and when they do have them, they must use them. The second implication of the global nature of low inflation is that there is a common responsibility for addressing its sources, whatever and wherever their origin. Indeed, to the extent that the environment in which we operate is more affected by the global output gap and the global saving investment balance, the speed with which monetary policy can achieve domestic goals inevitably becomes more dependent on others, on the success of authorities in other jurisdictions, to also close their domestic output gaps, and on our collective ability to tackle the secular drivers of global saving and investment balances. In a recent speech in Brussels, I made a similar point regarding the interaction between monetary policy and other policies at the domestic level, such as fiscal and structural policies. And there I maintained that central bank independence could best be described as independence in interdependence, since monetary policy can always achieve its objective eventually, but it will do so faster and with less collateral effects if the overall policy mix is consistent. What I'm saying here is that the same applies to at the global level. We may not need formal coordination of policies, but we can benefit from alignment of policies. What I mean by alignment is a shared diagnosis of the root causes of the challenges that affect us all, and a shared commitment to found our domestic policies on that diagnosis. Today, for instance, the way in which domestic policies respond to a shortage of demand globally will vary. In some cases, the emphasis may be on increasing public investment, in others on supporting private demand through more growth-friendly tax and regulatory policy, and of course through monetary policy. The relative stance of stabilization policies will differ across countries depending on cyclical positions, but the sign of the effect on global demand needs to be positive. Similarly, structural policies that aim at raising participation and productivity may take different forms in different places, but they need to achieve the same outcome, which is to increase long-term growth rates and raise equilibrium real interest rates. Where fora such as the G20 can play a useful, perhaps essential role in bringing about the appropriate alignment of policies, it is key that what is agreed in those fora is translated in the concrete policy actions. For example, there is a point in outcome of the G20 commitment to raise global growth by 2% with structural measures is one example of how intentions and actions can diverge. It contrasts with the more successful example that was provided by the coordinated global fiscal expansion in 2008-2009. Such fora, of course, cannot bind countries into specific actions, but mutual recognition of their common interests can act as a form of coordination device. That common interest today is a faster closing of the global output gap, more stable global inflation, higher long-term global growth, and greater global financial stability. And such an improved policy mix would help reduce unwanted side effects of monetary policy, since the burden of stabilization would be better shared across policies. For instance, in the current environment of global slack, the international spillovers from growth-friendly fiscal policies are likely to be wholly positive, since they primarily boost domestic demand in the home country. That is also true within regions such as the Euro area, where there are different local output gaps. The upshot is that in a globalized world, the global policy mix matters, and will likely matter more as our economies become more integrated. So we have to think not just about whether our domestic monetary policies are appropriate, but whether they are properly aligned across jurisdictions. We have to think not just about the composition of policies within our jurisdictions, but about the global composition that can maximize the effects of monetary policy so that our respective mandates can best be delivered without overburdening further monetary policy, and so as to limit any destabilizing spillovers. This is not a preference or a choice. It's simply the new reality we face. Thank you. Thank you. So before we start the sessions, let me just draw your attention to the electronic posters by the 10 young economists that we have selected among a number of applications like in the last two years, and they'll be on display. You may have seen them already in the foyer. Please take a look at them, take the time to discuss with the economists, and then place your ratings by the iPads. The results of your voting, the results of the iPad voting, will be valued together with the assessment of the selection committee, and the winner will be awarded a prize at the end of the conference tomorrow. Coming to the iPads, all available conference material is uploaded onto the iPads, which are for use in the conference venue only. They won't work outside. However, we've also taken feedback from last year that you wanted to be able to have printouts, so if you wish to have printouts of any of the materials, please ask our team and you can get that. When we start now with the panel discussions today and also tomorrow, you will have the possibility of actively participating in the debate by answering live some questions posed by the chairs. For that, take your iPads and go to the polling menu, and you will have roughly a minute to answer the questions, after which we'll show the results on the screen, and you have all the information there. At the end of the conference, we would also very much appreciate your answering a very short survey. As I said, we benefit from your comments and we improve. It's only four questions in two comment boxes, and then you can also access that via the feedback tab. I will now hand over and give the floor to Benoit Corré, who will chair the first session, macroeconomic and monetary challenges. After the presentation of the papers and the subsequent discussions, the floor will be open for the questions. And to help the speakers, traffic lights. We do have to keep a bit of time. Traffic light signal will show you the end of the time at your disposal. Please be mindful of the assigned times, and otherwise the chair will keep an eye on it, and if not, we will. Thank you very much. Thank you very much, Christine, and good morning to all of you. So let me open this session on macroeconomic and monetary challenges, and let me first reassure the speakers and commenters that there is no voting on their presentations. So voting will be laid for later. So that's a session on macroeconomic and monetary challenges, which maybe could have been more aptly titled from, borrowing from the title of Barry's paper, which will be the global monetary order, because that's what we're going to discuss globally and regionally or locally. And that's a common theme. And Barry very rightly starts his paper saying that the notion of a global monetary order sounds somehow like an oxymoron, given what we know of the performance of the global monetary and financial system over the last 50 years. And when reading this remark by Barry, it made me think of this famous quip by the Mahatma Gandhi when he was asked about his views on the Western civilization, and he said, oh, that would be a very good idea. So the global monetary order is a little bit the same question, and we'll be interested in hearing the answer. When you think about the properties or objectives, you would expect the global monetary order to deliver. There are mainly two. You would expect it to deliver efficient allocation of resources, and you would expect it to deliver stabilization, risk diversification, insurance against shocks, and mitigation of shocks. And of course, central bankers are mostly interested in the second discussion. Well, we are not indifferent to the good allocation of resources, but this is by and large not within our instruments, within our domain, while we have to focus very much on shock absorption. And the fact that we're having that discussion today after the European and global economy was hit by a major shock is relevant and topical. And I guess the starting point of the discussion is that a lot of the recent academic literature has challenged the shock absorbing capacities of the global monetary system as it is, both in terms of flexible exchange rates, freely moving capital flows, et cetera. So we're very impatient to hear about your latest thoughts about the issue. You know how the sessions are organized here in Sintra. There will be two presentations. So the first one by Barry on the global monetary order will then be discussed by Guillermo Calvo. And then we'll have a second presentation by Pierre Olivier, actually based on a paper, on a joint paper by Pierre Olivier and Elen Ray, who's also here and who's welcome to jump in at any point. Not contradicting too much Pierre Olivier, hopefully, but certainly in the discussion. Well, that's a fairly long title that you can see here, imbalances, safe assets, and the like. And David will discuss it, and then we'll have a broader discussion. So with a due delay, let me give the floor to Barry. Thank you, Benoît, and thank you to the European Central Bank for the invitation to this gorgeous venue. Thank you to the European Central Bank for the title. So the title was given me. I have a tendency to take my titles too literally, but this one did provoke me into thinking whether it's appropriate to contemplate the existence of such a thing as a global monetary order or whether we might better think of the current situation as global monetary disorder. My skepticism is perhaps underscored by the events of the last five days. The definition of order I found in the Merriam-Webster dictionary online is an arrangement of items in relation to one another according to a particular sequence pattern or method. So it's not outlandish to think about elements of an international monetary order given that definition. The exchange rate arrangements operated by different countries are not entirely without logic. One can perhaps discern a pattern or method in their choices. It's possible to find elements of order in policies toward international capital flows, which include in different countries restrictions on transactions on capital account adjustments and macroeconomic policies in response to those flows. And more recently, the adoption of macroprudential measures. It's possible to discern elements of order in the provision of international liquidity denominated mainly in a handful of leading national currencies that are created in deep and liquid markets and used internationally. So I've just snuck in my definition of international liquidity for the discussion that will follow. And it's possible to discern elements of order in how oversight of these aforementioned items is provided through the International Monetary Fund, but also through a variety of other regional, mainly regional entities. At the same time, clearly we see elements of disorder. My same source defines disorder as a confused or messy state. So that's not an entirely irrelevant definition from the point of view of global monetary affairs. So if you have not read the paper, you are about to be at sea because it's full of facts and information and analysis. It's my attempt to get my own mind around the current state of affairs and scholarship on issues like exchange rates, capital flows, international liquidity, and the global safety net. I've touched on a few highlights in my remaining 20 minutes, mainly focusing on the international liquidity aspect, which I think my discussion will then elaborate further and some issues related to the global safety net. There is a conventional wisdom about monetary frameworks, which is that a growing number of central banks around the world are turning towards something that we might label flexible inflation targeting or post-crisis, extended inflation targeting. It's hard to find evidence of that in the global data. If you look at what the IMF reports in terms of self-declared monetary frameworks in its member countries, you will see, perhaps to your surprise, that there has been no decline in the share of countries globally that practice monetary aggregate targeting. Also surprisingly, there has been no increase in the share of countries globally. This is, since roughly speaking the pre-crisis period, the share of countries engaged in inflation targeting. Again, I think that's somewhat surprising relative to the conventional wisdom relative to the fashion for inflation targeting. Surprising given the fact that inflation targeting seems to resemble an absorbing state that once central banks adopt inflation targets, it's hard to find an example of a country that has abandoned those that target. What we see in the data is a growing share of monetary frameworks concentrated almost entirely in other arrangements that are difficult to place under any of the aforementioned categories, arrangements operated by countries that either do not specify their framework or else they declare that they formulate policy with reference to, quote, an eclectic mix of indicators. So economists, academic economists tend to be purists. Evidently, central banks do not. Similarly with exchange rate arrangements, the data on IMF classification of de facto exchange rate regimes suggests, again, contrary to conventional wisdom, that there has been little tendency to abandon intermediate regimes since the crisis. There has been a rise in the share of countries operating so-called hard pegs, but that reflects almost entirely the accession of additional countries to the euro area as opposed to a global phenomenon. There has also in fact been a rise in the share of countries operating intermediate regimes due almost entirely to an increase in countries operating crawling pegs. So the conclusion side draw from this are two. Number one, that it remains the case that academic advocacy of floating notwithstanding the prerequisites for the successful operation of a freely floating exchange rate are daunting. They include deep and liquid financial markets, supervision and regulation capable of limiting currency mismatches, and a clear and credible policy framework that does not revolve around the exchange rate, something that not a lot of countries even today can claim. Number two, I conclude that a global monetary order based on free floating is no more realistic than a return to Bretton Woods-style global system of hard pegs. I will not talk much about, talk further about de facto exchange rate behavior other than to say the approach Shang-Jean Wei who is here has taken suggests similarly that we are moving toward a more eclectic multipolar system where different countries manage their exchange rates in rather different ways. Can be argued nonetheless that countries have made progress if not through changes in their exchange rate arrangements, through changes in accompanying policies in dealing with the currency crisis problem. So I show you here a time series bar graph of one measure of currency crisis conventional from the literature instances in which the exchange rate depreciates by at least 20 percent against a reference currency between successive quarters and does not recover by 5 percent or more in the subsequent quarter. This figure I write in the slide is a bit of a Rorschach test, I think different people will read it differently. I read it as suggesting that we have made progress in terms of addressing the currency crisis problem since the 1990s. What observe in passing that what has happened to sterling in the last five days doesn't rise to the level of a currency crisis according to the definition I use, doesn't rise yet to the level of a currency crisis according to the definition I use in the paper. More generally though we clearly have not succeeded in making a lot of headway on the crisis problem. So here I have updated through 2015 for 181 IMF members the various conventional indicators from the literature of banking currency sovereign debt crises and growth crises or collapses with more time I would provide more discussion. But I do think one can read this table as suggesting that intermediate regimes as categorized here not independent floats not hard pegs are especially crisis prone. So there is a tension between that fact and observed preference of many countries to continue to operate intermediate regimes. The paper then provides a fairly extensive analysis of international capital flows consistent with the mandate I was given. I would make basically only two points for this discussion. Number one capital flow volatility variously measured I measure it in a variety of ways in the paper remains a first order problem and what seems to have changed over time is that what was once predominantly an emerging market and developing country problem is increasingly an advanced country problem as well the same indicators of capital flow volatility that were once primarily evident or most evident in emerging markets are increasingly evident in the data for advanced countries as well. And number two the capital flow problem and capital flow volatility problem is taking on a new aspect that we still don't understand very well. What's the corporate debt aspect. We all have a lot of experience analyzing discussing sovereign debt problems. We have much less understanding I would submit of the corporate debt problem which is the new aspect in the increasingly troubling one. Do we understand well why why corporates in so many countries have accumulated such high levels of debt that now pose increasingly a problem for economic and financial stability. I would submit that the answer is no that we don't have good models and good understanding of why corporations are now suddenly to a much greater extent than before getting into debt problems that pose a problem for the global system. Maybe it's the case that emerging markets have made more progress strengthening government budgets than strengthening corporate governance which allows corporate borrowers to systematically underestimate the risks of foreign currency borrowing. Maybe international investors underestimate the risk of default by corporates with foreign currency debts when the borrowers currency depreciates. The non-financial corporations in emerging markets are arbitraging the new regulations that you all have placed on the activities of financial institutions. The closest I think there is to a synthesis is that emerging market corporates have been encouraged to borrow in foreign currency by unprecedentedly low interest rates in countries engaged in quantitative easing. They're prepared to incur those foreign currency exposures and foreign creditors are willing to lend to them perhaps because emerging market countries have accumulated massive foreign currency reserves which they will use to pay off those debts in the event of extreme events. Those are some conjectures, some hypotheses about what's going on here, but I would reiterate I think this is an aspect of the global monetary order that is not yet well understood. It and the capital flow volatility problem more generally continues to give rise to sudden stops, a term given currency by my commentator among others. Here I define sudden stops as episodes in which portfolio and other inflows by non-residents decline below the average in the previous 20 quarters by at least one standard deviation and they stay lower and I look at the comparison between the first half of the period for which data on flows through international bond markets are available and the second half of the period. What has changed recently if anything and the remarkable fact is that very little has changed. The frequency of sudden stops has not changed. The output drop that occurs in the wake of sudden stops has not changed between the first half of the period and the second half. There has been progress on the policy front. You all have done a variety of things to try to strengthen the management of international capital flows, macro prudential regulation and the like and yet you haven't reduced noticeably the incidence or impact on the macro economy of sudden stops. My interpretation is that capital flows have grown and the capital flow volatility problem has continued to grow to an extent that it has largely offset the destabilizing in terms of destabilizing macroeconomic impacts, any improvement that has been made on the policy front. The international liquidity problem, as I said before, I would define international liquidity as resources that are widely accepted internationally in settlement of cross-border transactions. They are held as reserves. They provide pricing benchmarks. They're regarded as reliable stores of value. They're accepted as collateral in financial transactions. They satisfy prudential requirements. They are the grease for the wheels of cross-border trade and payments for 21st century globalization. One hypothesis, one potential explanation for the slowdown in the growth of trade and cross-border capital flows is the shortage of international liquidity. To try to operationalize that idea, test that hypothesis, you need a measure of international liquidity. So here's one. What I've done is to sum for the OECD countries high-powered money and safe CRIPA and double A rated central government bonds, the bonds of super nationals like the EBRD and the World Bank and gold in official and private hands. If you scale that by global GDP, it has fallen by nearly half from the peak at the global financial crisis, reflecting credit rating downgrades for a variety of OECD countries primarily and the growth of the denominator of this international liquidity to global GDP ratio. Finally the global financial safety net. There has been some progress in building it. I show you a measure of it here. The sum of foreign exchange reserves, IMF facilities, central bank swap lines, standing swap lines and regional financial relationships, I would make two observations. Number one, while it has risen, it has plateaued. And number two, we continue to rely as an international financial community on international reserves held at the domestic level primarily as the dominant constituency of the global financial safety net. I would suggest in addition that there is less here than meets the eye. These are reluctant to use their reserves. What the IMF defines as the maximum reserves that countries need tends to be increasingly defined by the markets as the minimum that is prudent, which I think is a misunderstanding but which in practice immobilizes much of the international reserves that central banks hold. The problem of IMF stigma evidently remains that stigma problem seems to apply also to drawing on regional financial arrangements like the Chiang Mai initiative, multilateralization and bilateral swaps. An interesting exception is federal reserve bilateral swaps. Central banks are willing to actually draw on those and use them. So there is a question we need to ask about why the stigma problem that seems to apply in many other contexts does not also apply to federal reserve swaps. And I suggest here that a conjecture is that these are extended mainly by an apolitical entity, echoing some things Alan said last night, namely an independent central bank. Or federal reserve swaps don't come lumbered with political conditions and obligations, whereas IMF and CMIM support comes from institutions that are directly answerable to and perceived as carrying out the bidding of governments and the stigma. These four reform let me suggest some highlights and write my remaining minute. I think people who write about international monetary reform tend to fall temperamentally into two camps, radical reformers and incrementalists. So I'm squarely in the not so radical reform camp. And I would suggest focusing on the following. First, using policy incentives to address the volatility of capital flows by attempting to shift their composition from short to long term from debt to equity and to do that by using tax codes at the national level to make debt, less attractive, changing prudential regulation to make debt and short term obligations more costly, strengthening corporate governance, supporting in place proper insolvency regimes to help address the emerging corporate debt problems emerging in two senses. Number two, continue to rationalize exchange rate regimes by moving away from the unstable middle. I wrote a book about this in 1994 and I remain wedded to that argument. I think Europe reminds us that a hard peg is one option, but that the preconditions for making it work are formidable for the vast majority of countries. The other alternative of freer floating is more clearly feasible. I think Guillermo has written that floating is not a monetary regime. It is the absence of a monetary regime and moving away from an exchange rate anchor requires you to put another anchor in place. Inflation targeting, in my view, is the best we have. And there is evidence that exchange rates between pairs of inflation targeting economies are more stable than otherwise comparable exchange rates. So inflation targeting can obliquely at least address some of the ills of the international monetary order. Third, address global liquidity needs in the short run. That has to be done at the national level where credit downgrades have robbed some national bond markets of their liquidity. Those problems need to be addressed at the national level. I think international liquidity can potentially be augmented by allowing experimenting with limited allocation of SDRs directly to central banks rather than to governments directly to central banks in a manner that will actually add to liquidity rather than simply transferring it from one set of hands to another. Another way of going about the same thing would be to experiment with limited authorization for the IMF to borrow on capital markets to fund liquidity provision. And a final possibility is to allow the fund to experiment with a pooling of sovereign bonds in the same manner that in Europe you talk about possible ways of pooling the sovereign debts of different countries in order to create a higher quality composite that will be more widely accepted and more liquid. As a result, fourth and finally, enhance the global safety net by pre-qualifying countries unilaterally for IMF facilities and trying to address the problem of IMF stigma. So my own analysis of the problem of IMF stigma is that it has to do with the lack of political distance between the fund and its dominant shareholders. I have an old proposal together with Charles Wiplos who is here in the audience about how the IMF might be made more independent at least to choose its tactics and more distance might be placed between management and the Board of Governors. I think thinking seriously about moving in that direction is necessary if we want to address this problem of IMF stigma. Thank you very much. Thank you very much, Barry. So the floor is to Guillermo for the discussion. Thank you very much for the invitation. It's an honor to be here and I really enjoyed reading Barry's paper. But I had to make a very hard decision whether to focus on the paper itself or try to just take one or two points and elaborate on ideas on which I've been thinking lately. And probably I decided the latter because hopefully we'll enrich the discussion. So I will focus on the issue of liquidity. Let me see if I know how to operate this. And the first, there we are. So liquidity and so let me talk a little bit about illusions because that's how liquidity came into the attention of economies. And the first one is familiar to everybody. It's money illusion. It's a term that was very popular in the series. Erwin Fischer has a book about that. And even Lukas has relied his analysis, his famous early papers on the assumption that there is an illusion. This is W, the wage, P is the price level, the illusion is on P. So we don't know very well about P. So let me talk about P as a kind of an illusion. That's what's been emphasized in Fischer and obviously in Lukas' early papers. Now, nowadays, we are sort of going back to stuff that was discussed by Triffin. I call it the liquidity illusion where now we have real monetary balance is there. The illusion is on M. So M is, we usually call it money in our models. But the thing is that in practice, we don't know very much what it is. So whether we have a monopoly as Alan was talking about yesterday or not, there's a problem with M. There are lots of copycats out there. So in the US, M was abandoned in the beginning of the 80s in favor of the interest rate because the Fed concluded that it did not very well what was relevant M anymore. And so we chose I, the nominal interest rate, and now fast forward 2008 and we find that I doesn't work either. So we go back to M. But we really don't know what M is. We haven't done a lot of analysis on M. So that's where we are. That's the central point that I want to make. So we can talk, we see the relevance of M, but we don't understand it very well. Now in the meantime, we've seen some liquidity illusions that were broken. For example, illustrated by the asset back securities, the haircut index, how it sort of jumped up around 2008. So some assets that were considered highly liquid all of a sudden became much less liquid. Now if I apply this to the euro, the equivalent haircut of the euro, well, we have a picture where the haircut is not, this is from 2014 to 2013, it doesn't not reach 40%, but it's 20%. So I look at the euro, if I think of a world where the dollar is the center, is a king, liquidity king. So in reference to that, the ABS became a very fragile security in terms of that sort of liquidity. And when you think about it in terms of the euro and now the pound, from that perspective, assuming that the dominant concept for liquidity is dollar liquidity because it's the area that it covers, et cetera, then having float in a general rate is kind of accepting that there are other assets which are important out there that could be quite fragile. In terms of dollar. So if you take that perspective, right, so from that, I mean, from that perspective, by the way, the asset pack securities became kind of dubious liquidity objects, right? So that's where I'm trying to establish some sort of parallel. But don't take me literally. I'm just saying if you start from that angle, all of a sudden having float in a general rate, having these very sharp devaluations that we have seen and that are not anticipated and that are given partly by the market sometimes and even political considerations. We live in a world where liquidity is hard to define because things start to move around a lot. You have to take into account volatility, but what kind of volatility? I don't have time to elaborate on that. So this is the first point that under the present conditions, international liquidity as a concept is hard to assess. And one wonders in that context whether floating exchange rates freely float in exchange rates, if we think that liquidity is important for the functioning of the international economy, whether that's going to be very desirable over the long run. We know what the central banks do in order to perhaps preserve the stability, obviously, and also facilitate liquidity. There are these currency swaps. So here I only have a question. Is the currency swap a good substitute for Bretton Woods II or some sort of narrow bands and stuff like that? I have a question only, but obviously central banks have react to that. And the first reaction I heard from the Fed the other day is that they were ready to be the lenders of that resort if necessary. So there is a bit of sensitivity to excessive volatility and the impact that that may have and one of which could be the liquidity impact. And then there are questions that Taylor, for example, suggests that maybe you don't want to go to Bretton Woods II, but if you have Taylor type rules of some sort agreed upon that could sort of give some more predictability. I have the feeling now that we talk about floating exchange rate and Barry mentioned something I said many years ago about floating doesn't mean anything because it simply says that you don't fix. So what does it mean to float? The poor guy in the street doesn't know what you're talking about. When are you going to intervene? How much volatility are you going to allow? Just saying that the central banks will get together and start throwing these swaps around is not a lot of information. You are making something which if we think it is central, now if you think that the financial market substitutes for money that now we live in a world where money is irrelevant, that's fine. But if you need the support of liquidity stuff, then I think that's a point where we want to think more about it and have an answer. Now in relation to that, I'm sort of reinforcing this. Let me bring up the issue of helicopter money which has become very popular and the limits of that. Now I have not coordinated with Alan about this, but he's the same guy as you see. So the question is why and we talk about the dollar as something which is strong, which is quite surprising because that's nothing, that's a piece of dirty paper. Sorry to say it. So how come we are so confident about the dollar? No, of course the answer is not the musical. Although obviously it must have made it more popular than it was. He has an answer because obviously he was very concerned about the liquidity trap. And that's an answer you can find that on chapter 17 of the general theory that economists, I don't think economists have paid attention to this. The bottom line is that sticky prices is what makes the difference. And we said our prices in terms of dollars. We don't set our prices in terms of ABS. We don't set our prices in terms of any security which is considered liquid in the United States. It's the dollar, and the dollar is in many other places in the world. So that's the advantage of the dollar. And that's an interesting, I find it very interesting conjecture because the more popular one is that the fisk will come and do something if necessary. But you don't need the fisk. Really it is us who are providing the support for the dollar. So kind of jokingly, maybe we should put on the back of the... Not only in God we trust. But I think that kind of important. So that conjecture I call the price theory of money to turn it around. So sticky prices used to be a nuisance. Under these perspectives, sticky prices are the cornerstone of a monetary system. We have money because we have sticky prices under this perspective. If prices were totally volatile, I don't know what sense money would have. Because as we have, I mean, some analytical results are there showing that the general equilibrium model, there is always an equilibrium where the price of money is equal to zero. Because if it is zero, nobody wants the money. So it is an equilibrium. So that equilibrium would be present there. Prices were perfectly flexible. But they are not. So that's the whole topic for discussion there. I have a book coming up discussing some of these issues. So the price theory of money helps to sort of give a basis. Some understand what that thing is so strong. But also raises other questions because the price theory of money, even if you take this literally, if you think it is relevant, I mean, it's not everything. So if you start putting up things on the dollar, I mean, fixed income securities on the dollar, then there's a whole pyramid of things on top of that. Obviously, the dollar has some support, not for everything else. So when you think of it that way, all of a sudden, then you start worrying about whether that is strong enough to support, could we have a run? That was Trifin's problem. Of course, under his way of thinking about this, I mean, he was writing in a period where the dollar was pegged to the gold. So it's an additional complication. But even if it is not pegged to the gold, the question still is whether these currencies where I have the dollar and the euro, very strong currencies in principle because are many, many people and firms setting their prices in a sticky way in dollars and euros. There's still the question of whether you could not be at some point overburdening the support of money. And that's where you come to think about the QE as something that may be very effective for a while. But if you keep pushing, maybe there are decreasing marginal returns to QE. And I think that's kind of relevant because it's one of the topics that we discussed. But if we don't put that, if we don't have a rationale for why that dirty piece of paper has value, we cannot go anywhere because that's my feeling that much of the discussion we talk about safe assets. I know from a practical point of view, I mean, it's quite clear we would agree that there are safe assets and so on. But what makes them safe? And if among those safe assets, the dollar bills are safe, then that's very hard to explain except if you buy the... Now let me just finish with a couple of things. A negative interest rate from the point of view of liquidity, well, you know, a negative interest rate is an inflation tax. And whether that's good for the quality of liquidity, I don't know. It increases the cost of collateral. You make the collateral less attractive. So it all depends when you put liquidity in the demand side or the supply side. And the presentation that Barry made, he referred to collateral. If the liquidity is important for collateral and you have negative interest rates on liquidity, then you make it more costly, the collateral. And it could become productive from a supply point of view. And also just something more practical, using the interest rate, the models that we have, I think they are very misleading. They are simple, they are being very useful, but for these occasions where liquidity plays a central role, I would be very careful. The neo-Kenshin model assumes that the interest rate goes directly into the Euler equation, that is to say, goes into the vein. There is no intermediation, the liquidity doesn't bother you. You can control interest rate and it goes into the investment function right away. But if the interest rate also reflects problems of liquidity, you may change the interest rate and not have a very big impact on decisions of consumption and investment. So maybe you had to push it down a lot and remember what the worker had to do in the 1980s, going to minus 20 percent of course is almost unthinkable. But that's something that we should factor in the discussion. For emerging markets, this very quickly, I agree that we have to think of ways. There is a problem of stigma, I almost finished, I promise. There is a problem of hard capital into emerging markets. We have some work in the past, 1993 paper with Carmen Reicher and Leo Ledermann about the sensitivity of capital flows to the interest rates in the US. So the short-term interest rate in the US, so my reading of that is that capital, what we call hard capital is capital that is looking for some place to park liquidity. So that's why it is so sensitive to interest rates. So what to do about it? And I'm suggesting to think about what I call the emerging market fund, which would be a fund that would help to stabilize an index. And it could be run by the IMF. I don't have time to enter into details, but one advantage of something like this is that it may help to bypass the stigma problem. Number one, because it provides liquidity to an asset class and is triggered by the IMF, it's not that the country comes forward and asks for support. What is the inspiration behind this is the 1998 crisis, some people call it the Reich, or the Russia crisis that triggered a very big impact on all the emerging markets. There was a lot of contagion going on there, so maybe there is a fund that sort of stabilizes as the central bank, the advanced economy central bank did in 2008. And in my mind, it helped to recover quite quickly the emerging market that did not happen. In 1998, it took about four years for the MB to go back to what it was before the crisis. So these are my comments and apologies for taking more than my time. Thank you very much. So Barry will have the opportunity to comment when we start the overall discussion. So let me just turn to Pierre Olivier. Okay, well, thank you very much. It's really a pleasure to be here, this wonderful event organized by the ECB. And I guess my slides will be coming up shortly. While they are coming up, I can tell you one thing, unlike Barry, the title of the presentation was not given to us by the European Central Bank. In fact, we received a very general invitation and the topic to work on, which we dutifully ignored and started to work on the things we thought Dylan and I were interesting. And what was really quite remarkable is that at the end of the day after we finished and went back to what the ECB and the organizers that asked us to focus on, we were remarkably closed. To me, this is telling us that the kind of issues that are on the front of our mind are the same as the ones that the ECB is concerned about. Okay, so now that I've... Ah, there we go. Thank you very much. So this is work I've done with Ellen Ray who is here. And it has a long title, real interest rates, imbalances, and the curse of regional safe asset providers, which sounds like a Harry Potter volume, but is not. What we are doing here is we're thinking about three questions that have been mentioned already in the introductory remark by Mario Draghi earlier this morning. First, what can we say about global real interest rates and why are they so low, especially when we think about real rates, and for how long are they going to remain low? And here, there have been a number of explanations that have been put forward. Larry Summers recently in a speech at the IMF revived an old idea, the idea of secular stagnation that was first written about by Alvin Anson in the late 1930s. There is also, there are explanations based on the excess of desired savings over investment and the saving gluts that results from this that go back to Ben Bernanke's very famous speech in 2005. So we're going to have to say something about this. And then we're going to turn around and say, well, if we understand a little bit better what's going on with low real interest rates, then what does it tell us about the pattern of global imbalances and how they're going to evolve over time? And one view was that global imbalances arose from rapid growth in emerging market economies in part, maybe in the 2000s. And so if we are in an environment of lower growth, then should we expect these global imbalances to somehow resolve themselves or not? And here, we're going to have a somewhat negative answer. And then we're going to narrow down the focus and look at safe asset providers. Already today we've discussed in various presentation that's touched upon the issue of safe asset scarcity. And we're going to ask specifically, when we look at regional safe asset providers, the kind of trade-off that they're facing and the kind of difficulties that may arise from this. So this is a picture that everyone has in the back of their mind. This is nominal 10-year yields, long-term rates here for the US, Germany, the United Kingdom and Japan since the 1980s. And we all know they've been declining. We all know that the decline is not just because of the decline in inflation over that period, but also decline in real rates. Now if we take a longer historical perspective, here's the US real rate. This is a short real rate going back to 1870. And you can see on this graph here that this is a 1980 to 2015 period. This is a decline you just saw on the previous graph. But if we go back in time, we see that this is not the first time real rates have been low or negative in the 1970s. They've been briefly low as well. But more importantly, they've been fluctuating. And historically they've been periods in which they've been high and periods in which they've been low. And so we're going to try to understand what happens to real rate from that sort of long historical perspective. And so what we're going to be doing here is to shed some light on this issue, we're going to look at a ratio which we believe is important, which is, if you want, if you think of this as the average propensity to consume out of wealth. So we're going to construct a measure of aggregate consumption. We'll try to make it global by thinking about, well, mostly constrained by the data we have. So we'll be looking at the US, the UK, Germany and France. That's the countries for which we can get consumption and wealth data going back to the early part of the century. And for which we're going to be constructing this ratio. And I want to bore you with the details of the empirical exercise. Just going to try to give you the insight for what we're doing. So this is this consumption wealth ratio. Where wealth here is a measure of not only your financial wealth, but also lands, building, agricultural land, residential housing, et cetera. So this is a graph of this consumption wealth ratio going back to 1920 year. Again for the average of these four countries, the US, the UK, Germany and France. And you see that there are periods during which this ratio is low and then it goes up and then it comes back down again. Now I want to point your attention to one thing, which is the period during which it was low here was exactly in the 1930s when Alvin Anson was writing about secular stagnation. And the period during which it is low again here is in the 2000s when Larry Summers was writing about secular stagnation. And I'm not going to claim that this is not entirely a coincidence. In fact if you think about what's driving this ratio here, you can think about why would the ratio of consumption to wealth fall. So what will happen when there is a very rapid increase in wealth, the denominator in this ratio. And so that usually tends to follow periods of rapid increase in asset prices. So financial bubbles or a very rapid increase in financial prices. So you see that in the 1920s of course and then you see it again in the 2000 with first an asset price increase and then the residential housing that increases. So what happens after that? We have a crisis. And after that crisis what we see is this ratio because of the crisis wealth is going to fall so the ratio is going to bounce back but not completely. And why is that? Well because at that point the workings of this financial crisis is going to depress consumption and activity for a while. So consumption and wealth ratio is going to remain low for an extended period of time. And while this consumption and wealth ratio is remaining low, every agent in the economy is trying to repair their balance sheet, households, corporate sector, the financial institutions, the governments, everyone is trying to save. Or you can anticipate what this is going to do to interest rates. It means that we're going to have an extended period of low interest rate. So this is why this ratio is particularly interesting when we want to look at this sort of low frequency movements in interest rates. Now as I said I'm not going to bore you with the details of our empirical exercise but let's just say that we're going to be able to decompose this consumption and wealth ratio into three components. One is going to be something that is due to future risk free rates. That's this red part here. Another part is going to be something that has to do with the risky part of the return on wealth. So think of this as a risk premium component, the risky return relative to the risk free rate. And then there's another part that's related to consumption growth itself because that also is the numerator of this ratio. That also can influence how this ratio moves over time. And we're going to do a decomposition exercise. Here's this ratio again. I've taken logs and I've demeaned it so it's around zero. And first I want to show you that our empirical exercise is going to do a fantastic job of accounting for what we see in the data. This gray line I just superimposed on it. This is our predicted consumption wealth ratio. In other words the right hand side of this decomposition I showed you. So we're able to capture most of the movements in consumption wealth. Now we can turn around and we can ask okay well where is it coming from? And it's coming mostly from this red component which is future risk free interest rates. So consumption wealth ratio encodes a lot of information about future interest rates. If I ask okay what is coming from the risk premium, the return on risky assets, almost nothing. What is coming from consumption growth which is a combination if you want of productivity growth in the future and population growth in the future because this is total consumption. There is a little bit there but there isn't really that much. So our conclusion from this exercise is that we have a lot of information in this variable and it's telling us that a lot of the movements in consumption wealth are driven by this boom bust financial cycles that we had in the 1930s here and we had again in the 2000s. And perhaps less so or at least we cannot tell really for sure how much we have coming from a slow down in productivity growth or maybe how much is coming from demographic trends. What we see very clearly is the financial boom bust cycle at the global level. Now we turn around and we ask okay well if this is useful, if this contains a lot of information about interest rates can we predict interest rates with this? And the answer is yes. So here on this graph is the average of the short term risk free rate, this is an average for the US and the UK, Germany and France the data is a little bit more murky because especially in the 1920s there were a few episodes of very very strong price instability. But if we look at countries that didn't have hyperinflation episodes or very strong inflation episodes this is the average of the tenure at every point in time and in red this is our forecast of what the interest rate would have been at that point in time for the next ten years. You can see that we are capturing a lot of the movement in the future rates. And what does it tell us here at the end of the sample? This is in 2011, well it's telling us that the risk free rate we can anticipate from this exercise is going to be about between negative 2% in real terms and zero for the following ten years, so until 2021. So the conclusion from our exercise is real rates are low, they are going to remain low, that's going to be largely driven by the aftermath of the financial crisis and the deleveraging processes that are at play in the world economy. So that's the first part of our exercise and this is just summarizing what I just said. Okay, so now let me turn to global imbalances. So global imbalances I'm going to start with this graph which most of you I'm sure have seen in one form or another. This is a plot of current account surpluses above the zero line or deficits below the zero line scaled by world GDP so everything is in the same units in some sense, four various countries and regions of the world. And in red of course we have the US current account whose pattern we know very well so pattern deficits are increasing until the financial crisis and then our receding they're divided by factor two about but they have not disappeared. So the current account deficits of the US are about slightly above 0.5% of world GDP as of 2015. Now what happens on the funding side? Well something very interesting has happened on the funding side. If you look at two things that happened on the funding side. First is gray bar here, those are the oil producing countries and what we see is the oil producing countries are surpluses have largely vanished actually predicted to be a small negative number in 2015 according to the world economic outlook data. Even more interesting is the green bars here that's the eurozone and this is for the constant geography of the eurozone with 12 members. The eurozone surpluses have been increasing very, very sharply and especially since the onset of the eurozone crisis. And what we see here is that towards the end of the sample they are larger than the surpluses of China or Japan or almost anyone else in the world economy. Now if you zoom in on this green bar here and you look more specifically at the eurozone current account balances if they come up which they don't. So I see someone is moving an arrow in the background so frantically trying to solve the little technical problem here but let me continue and hope that there he goes. Well this is the same geographical distribution of current account balances for the eurozone countries but now scaled by eurozone GDP and what you see here the striking fact is as of 2014 and 15 we don't have any deficit countries anymore or you know to a first order tiny, tiny deficits but they don't really matter. So we have this huge swing into surplus that's mostly coming from the elimination of the deficits for all the deficit countries back from the first part of the 2000s. Now what's interesting is in this environment of very low interest rates the pattern of global imbalances doesn't become less important low interest rates and low growth. In fact if anything it becomes more perverse and what we call in some work I've done with Emmanuel Farri and Ricardo Caballero what we say is the imbalances mutate from being relatively benign to malign at the zero lower bound. And the reason for this is if you think about regions or countries with large surpluses what they do is they push down global equilibrium interest rates in normal times but once you hit the zero lower bound that equilibrating mechanism doesn't work anymore and at that point what takes its place is a global recession. So excess saving in some regions of the world when we're closer to the zero lower bound can push the global economy into a recession. And not only that but in that environment there is one variable that takes a very important role and that's the exchange rate because through movements in the exchange rate countries or regions can try to capture a share of a world aggregate demand that remains too depressed but they can try to capture it at the expense of other countries. So we have a very very real potential for currency wars. Now if we turn around and ask ourselves okay I told you first that we have this low interest rate because of this financial boom bust we are in the process where a lot of economic agents want to have old safe and liquid assets then let's focus a little bit on the providers of these assets. Well first we know that if these assets are relatively scarce then their price will be high that's just another way of saying that interest rates will be low. Now we also know that the suppliers of these assets are going to enjoy a funding advantage because they're providing these assets to the rest of the world so they are going to have lower funding cost than the rest of the world. This is something that various people over the course of history have called the exorbitant privilege of being at the center of the international monetary system if you want. And this exorbitant privilege is actually quite sizable in work I've done with the land in the past we find that for the U.S. it's of the order of maybe two three percent excess return per year on the external portfolio. But there is a flip side to this and I want to focus on the flip side today. So the flip side is there must be also in exchange for providing safe assets to the rest of the world those countries must have a more exposed external balance sheet. It's almost the flip side it's a flip side of the coin. It comes with the territory if you want. And that's what we've called exorbitant duty. In other words you must be more exposed and you must be willing to absorb losses in times of global financial instability. Now how risky is your external balance sheet well in the U.S. we've estimated that the losses since 2007 between 2007 and 2015 cumulative losses have been of the order of 23 percent of U.S. GDP about for a little bit more than four trillion dollars. The potentially larger the data is not perfect but those losses are potentially larger if you look at a country like Switzerland. And I'll come back to the case of Switzerland in a minute. So if you're a provider of the safe assets you're going to have a huge demand from the rest of the world and then you're going to end up with a very exposed external balance sheet. That's going to be an unpleasant situation. It could actually even lead to a situation where it threatens maybe your fiscal capacity. And that's in the sense what Griffin was talking about when he was talking about the Griffin dilemma in the 1960s. So this is sort of a modern version of this. Now what can you do. Well one of the things you can do is you can let your currency appreciate today so as to limit your exposure exposed. So there is a trade off here that countries are facing between an appreciation of their currency today which is unpleasant as well because it means that your tradeable sector is going to be less competitive. You're going to suffer in terms of the competitiveness of your industries or suffer the potential for larger losses in the future. And this trade off is going to be worse. Both terms of this trade off are going to be worse. The smaller the country is. And so that's why I wanted to come back to this issue of the regional safe asset providers which is particularly relevant in the case of Europe. So let me illustrate with a graph here that is borrowed from some theoretical work that Elan and I did together in a separate paper. What I show you here on the horizontal axis is the appreciation of your currency. And on the vertical axis is the net exposure that you have on your external balance sheet. And this blue line here is the trade off that you're facing. You could have more exposure if you decide to keep your currency unchanged. The more you appreciate your currency the lower is the exposure you have. And this trade off here is worse if you're a small country. That's for the small safe asset provider, the line that is out there. And the line that's closer to the origin would be for a larger safe asset provider. You don't take as much exposure relative to your own economic size or you don't need as much of an appreciation. An interesting thing is I think that if we think that countries dislike having too much appreciation or dislike having too much exposure, they will try to choose a locus that is at the tangency point between the trade off and their own preferences. And for a large country you can see that this trade off may lead them to take quite a bit of exposure and they don't need to have as much appreciation. For smaller countries our conclusion would be that they will have to rely on letting their currency appreciate more. If they don't then instead if they fixed their currency for instance they would be at a point like point C here with an enormous amount of exposure. And that's how we analyze the situation that Switzerland has faced between 2011 and 2015. From 2011, September 2011 the Swiss National Bank announces that it wants to peg, it puts a floor which amounts to almost the same thing on the value of the Swiss franc corrective to the euro. Effectively it's saying we're not going to let this appreciation process play so we're going to take the exposure both the Swiss National Bank but also the country as a whole. And that meant very elevated levels of exposure which eventually the Swiss themselves felt very uncomfortable with and therefore decided in January 2015 to let the currency appreciate moving from point C to point B. So that's our interpretation of that particular episode. But now what I want to do is I want to focus on another case which is what we call core EMU. So if we think about the safe asset providers inside the eurozone. So that's Germany of course but that's not just Germany, that's also France and the Netherlands and Belgium. And here we know the story about what happened since the onset of the common currency which is that these countries became safe asset providers but with an extra twist. So they didn't just provide insurance to other countries inside the eurozone but they also intermediated foreign capital coming from the rest of the world towards the periphery. So French and German banks would actually be able to borrow internationally and then channel these funds to the periphery countries. That's something that's been shown very convincingly in some work that Moriape's felt is done with getting a hell. Now the eurozone inside the eurozone there is a common currency so you can't let the currency appreciate. You are in fact in terms of the previous graph you're stuck at point C there. So you have to sort of have this elevated level of exposure. Unlike the case of the US most of that exposure wasn't a form of cross border loans and debt not equity or direct investment and that's going to play a role in the second part of the story. Because once the crisis happens when the crisis hit then instead of having a market repricing of these instruments, equities going down and the market value of corporations doing direct investment being repriced what we had is that the losses were not realized. Instead we had a very protracted resolution process where the losses pushed first onto public sector balance sheet and then also pushed back onto the periphery balance sheet. And the consequence of that was that it triggered multiple rounds of deleveraging policies in the periphery itself that is what is behind this big push towards surplus in the current account of the eurozone. And so in effect the eurozone as a whole became a net demander of safe asset pushing its recession to some extent onto the global economy. Now we do a simple calculation which is very back of the envelope so we have to take it with a grain of salt. We ask suppose Kory MU would have the same balance sheet structure as the US with market instruments but given its bigger size since there is no possibility for an appreciation of the currency what would have been the losses incurred in the event of the crisis and we find a staggering number. We find 40% of Kory MU GDP. Now this is not a normative number. We're not saying this is the size of the losses that should be reabsorbed onto Kory MU balance sheet but we're saying this is an indicator of the kind of exposure that comes with being the safe asset supplier inside the eurozone and of course that's going to create a lot of problems when you have to resolve losses that could be very significant. So the conclusion from this is that the curse of the regional safe asset provider which has just described this unpleasant tradeoff between appreciation or exposure has been at play in the MU as well but it has also been a curse for the rest of the eurozone and perhaps even for the global economy. Now I've already mentioned this, policy implications and I conclude with that. There are three things we think can be relevant in the current context especially if we think about this more narrow focus on the Kory MU safe asset provision. First it's going to be important to delink safe asset supply from a single country or small group of countries. And so here there are various proposals and we are not, this is not a purpose of this paper to discuss them in detail but all of them have a common good feature which is that they allow some form of pooling across, of resources not necessarily of losses across a broader base. Second point is an orderly and speedy loss taking mechanism is also going to be important if we want to avoid this protracted rounds of delivering. And third moving towards more market based instrument and here something like the capital markets union can play an important role is also something that would be beneficial. Thank you very much. It's a great pleasure to be here, give thanks to the European Central Bank for asking me and also to Elaine and Pierre Olivier for this very stimulating paper. This comes as a sequel to a continuing flow of empirical wake up calls which Elaine has delivered to all of us in thinking about international macroeconomics. The conventional wisdom has been that the impossible trinity enables countries if they have floating exchange rates to operate an independent monetary policy and defend themselves from international risks. Elaine's argument pursued over the last few years has been that the global credit cycle makes that impossible. That countries experience excess credit growth or alternatively monetary conditions which are too tight imposed on them by the rest of the world in validating the trellema and making independent monetary policies with floating exchange rates not feasible. This has the implication of changing the way that we think about international macroeconomic policies and it needs those of us who think about international models it leads us to think about replacing uncovered interest parity with the much more careful modern portfolio theory of asset allocation by investors in the face of differing risks across countries. This has policy implications of two kinds for capital controls in emerging market economies and for international cooperation in the setting of macroeconomic policies in advanced countries of the kind that Mario Draghi was talking about earlier this morning. I expect today more of the same and a discussion of those issues. Instead, we got something which builds upon this in a very different way but in a way which turns out to be closely related. The first thought of the paper is to add empirical support to the well understood ideas about why long term real interest rates are likely to continue to be low. The very careful analysis of consumption being low relative to wealth is something which is very useful in thinking about this tendency. We can think about the reasons that underlie these pressures coming from the deleveraging in the financial system and also from lack of confidence by consumers and investors as well as for the reasons that was discussed by Pierre Olivier in his presentation. The reasons which these are shared across countries we can think of in straightforward Mondeau Fleming ways, low demand being transferred in that way that we think about in a world with uncovered interest parity. We can also, and I think it's useful to think about these forces as being shared between countries in a way related to Elaine's earlier work about the international transfer of risks through the global credit cycle. This has very important implications for global macroeconomic policy which Pierre Olivier talked about briefly and which Maria Draghi talked about at a great length in his earlier talk. The first of these implications is that the zero bound, the tendency towards exchange rate warfare as a way of thinking about macroeconomic policy and attempting to push macroeconomic policy forward for individual countries is a very real one. How to think about the macroeconomic policy circumstance in this situation was very clearly identified by Maria Draghi as going right back to the Mead, Timbergen set of ideas on targets and instruments. In the immediate period post the global financial crisis in 2009 there was an understanding that there was a need for a shared expansion and this was first monetary and when the zero bound was reached fiscal so that the use of fiscal policy was pursuing the problem of low global demand. But in 2010 at the G20 meeting in Toronto it was decided that public debt became a target of policy and we reached what Mead, Timbergen would have called a world with a shortage of instruments for targets and since then the use of fiscal policy in the pursuit of the public debt target has meant that an addition to the problem of low global demand in circumstances where monetary policy is not able to act and has pursued, has forced countries to pursue QE and the related depreciation of exchange rates as a way of attempting to push their economies in the direction required and made more difficult by fiscal policy not helping. I've talked about these things in a paper which I reference at the bottom of this page in a book which has just come out from Brookings. The third part of the paper goes on to talk about exorbitant privilege and duty in a world of this kind that faces regional providers of safe assets. Such providers undertake the important point being made, they are undertaking risk transformation. The example that we all understand which Elaine worked on many years ago is we now think of as Chinese depositors holding US treasuries, low yield, low risk and US authorities and residents holding foreign assets higher yield, higher risk. They call this I think rightly a triffin problem but it's interesting to think about the way in which this is a different triffin problem from the earlier one. That was often thought about as a currency problem but I think of it really as a problem arising out of economic policy making in that world of the Bretton Woods system in which Germany and Japan were unprepared to devalue, to appreciate their exchange rates and the US couldn't devalue. The countries in Europe and elsewhere faced surpluses and they were also forced to accept an unwanted US currency as the concomitant of these surpluses. But this was a policy problem, a macro policy making that led to this triffin problem about holding excess, holdings of dollars. Here we have instead a 21st century triffin problem which is about the capital account and emerges from this transformation of risk that we've had described for us. Here we've seen in the last few days after the Brexit shock this at work with the exchange rate for Japan appreciating a triffin problem facing them in the conduct of their policies. But as Pierre Olivier has said to us very clearly it also applies to Germany. The deposit is from abroad in Germany accepting safe assets in Germany and connected to the target to balance this problem augmenting this. And that last thing about Chinese is a holdover from an early bit of the slide, not relevant here, it's equivalent to that. And the German asset holders holding risky assets elsewhere. But the paper and I myself also argue that spreading this privilege and duty to the rest of the Eurozone has very significant consequences for the GYPS countries. Bringing them towards a Eurozone appreciated exchange rate, leading as the concomitant part of the very large euro surpluses, appreciated exchange rate and shortage of demand in Europe caused by the policies adopted. This is not helpful for the GYPS countries in attempting to pursue full employment as well as the external position. And this is also imposed bearing the burdens of the risk which the system has put in place when the collapse came in 2010. Currency devaluation was not possible and the burden imposed by this risk became both a private sector and a sovereign debt burden in the south. And this description of the macro workings of the Eurozone creates an important additional argument to the ones which are in common play about the need for the writing down of sovereign debt in some of the southern European countries. The whole of this analysis I think is very helpful in thinking about the last few days. And it's important to say that I stand here embarrassed in coming from the country that has imposed this shock on the world in the last few days. And like all of us in this room, very concerned to see if we can find a way forward in dealing with this very large shock. The shock creates additional problems for global macroeconomic policy at the world level and I talked about the difficulties of those, that global macroeconomic policy in a world in which there has been very significant fiscal consolidation. This adds to the need for thinking about cooperative fiscal anti-osterity policy now. And I'd pick up the point that Mario Draghi made about the G20. I was involved in the 2014 discussions in Australia that led to the two in five objective in Australia of raising global GDP by means of a mixture of infrastructure investment and microeconomic reforms that would demand promoting. That objective has been somewhat dropped. It's the right way to describe what's happened subsequent to the Australian presence of the G20. I think it's important that it's picked up again by China this year. The G20 is a forum in which the kind of cooperation between fiscal and monetary policy which Mario Draghi talked about is possible to both discuss and achieve. But also the second and the last part of the paper talks about the difficulties with the Brexit shock as imposed on the world and in particular the Eurozone for Germany but also in the south. And the very significant move in asset returns in Italy in the last few days as a response to this shock throws into even larger relief the difficulties of need for debt write down in parts of the Eurozone which I think this whole framework has made important to the whole policy process has made it important to consider and the framework which Ray and Grinch has shown us provides a way of thinking about. Right back to the beginning why did we get here. This problem would have been much easier to deal with and much less likely to occur if the policies of austerity which have been adopted had been tempered and put into a framework of looser fiscal position until the recovery globally and with Europe was in a secure position. I myself think that there was a contradiction within Britain between the fiscal austerity and the ambition to win the referendum which crashed so badly last Thursday in my country. I think there is also within Europe a contradiction between the fiscal policies which are being adopted in the north of Europe and the kinds of issues which have been presented in the Grinch and Ray paper to us today. These issues throw into sharp relief the need to think more carefully about fiscal and monetary cooperation within Europe as well as in the rest of the world. Thanks very much. Thank you very much David. So we have 25 minutes or so for discussion I will first give the floor back to the speakers to give them a chance to comment on the comments or to answer the comments. But before that I would like to add two remarks of my own so I know I'm abusing my position but I guess I have one shot and that will be it. The first remark and the two remarks are related and both remarks are about safe assets. The first remark was made by Guillermo already that my I mean there are lots of fantastically thought provoking ideas in both papers but my frustration would be that you're not spending that much time discussing what's a safe asset and the safeness of assets of safe assets. Elaine once had a paper on the monies of money and we could have a discussion on the safeness of safety. And in particular what which kind of policy framework can contribute to the safeness of assets and that's about ex ante incentives and that's about the fiscal framework in Europe for instance. So just to illustrate I see a contradiction between what David just said which is there was within too much austerity and what you've said which is there is a shortage of safe assets. If we want to see safe assets we need some fiscal frameworks. So the first remark second remark which is related. I see a tension in the policy recipe or the policy toolbox which which Barry put forward which is saying at the same time we want to see cross border capital flows being more based on equity and less on debt which I fully agree and that the whole point of our so-called capital market union in Europe for instance that we would like in tri-euros on capital flows to be more based on equity and less on debt or bank loans and I agree with that. And then again the shortage of safe assets and that's again between the tension between ex post incentives and ex ante incentives in a sense. Ex ante you would like more of the internationally used assets to be less absorbing to set incentives right and that's about equity flows that also the bank bail in that we have in Europe. So we want bank bonds to absorb losses and that's good in terms of ex ante incentives and then expose your regret to regret that safe assets are not there anymore. So how do you square this. So these were my two questions. As you wish. Yeah. Barry do you want to start. I think our chairmen's two questions really do cut to the core of the discussion. I think it's right that moving toward more equity like claims does introduce an element of ex ante risk that will have a depressing impact other things equal on the on cross border capital flows on the collateral function of so-called safe and liquid assets. There is a trade off there and international capital flows may be a casualty in part and that may be a price that that in our wisdom we should we should accept. The other point it has come up in in every single intervention this morning is the idea that safety or liquidity is a difficult slippery concept and indeed indeed it is. I prefer the older language about emphasizing liquidity the ability to buy and sell large quantities of an asset without moving prices significantly against yourself. But I think that's what other people have in mind as well when when they invoke the modern term safety safety and liquidity have come in for lots of discussion in the in the national and the domestic context post financial crisis. They're now coming in for the the same discussion in the international context. I think that analytical issues are equally slippery. I think some of the problems and dangers of self fulfilling liquidity crises that we have focused on in the domestic context post financial crisis arise in the international context as well. They point out the the need for a liquidity provider of last resort which is even more problematic in the international context than it is domestically internationally we continue to rely as an international liquidity provider of last resort to a remarkable extent on the Fed which means that liquidity provision in last resort is available to some economies primarily advanced and not emerging a long standing problem that we've only begun to address. Yes so very briefly because I think Barry addressed a number of points that would have addressed exactly in the same way but safety is something that we recognize when we see it and that is when you don't see it anymore when you don't want it disappears you knew it was there and it's not there anymore. More substantially it safety means different things to different economic agents or different market participants. Some for some people it's about nominalism is sufficient others care about currency others care about collateral the market environment is important and in a sense this is something I want to touch upon the notion of safe assets and especially when we think about different assets issued in different jurisdictions with different in different currencies the currency movements becomes part of this and asset could be safe locally but if it has a negative beta globally then it may be not safe for the rest of the world it may still be held locally. So there are different components of this demand and I think that's an important part of the discussion. You asked about shortage of safe assets versus austerity how can we have safe assets if we don't have a good fiscal stance. Yes this is true and in a sense we could see that the efforts of rebuilding public sector balance sheet is to prepare us well for the next crisis but we first have to get out of the current one and in the current one we have to be concerned about self-defeating efforts in terms of aggregate activity. The separation between contingent payoffs versus non contingent payoffs safe requires some form of non contingency but here I think an important distinction is between private and public assets. I think when we're talking about introducing contingencies we're mostly talking about having it on the private sector side and that's an important thing. I think the capacity of the private sector to issue safe assets is very very limited for reasons that are discussed in literature and have to do with the fact that they don't have a direct backstop that's tied to fiscal resources or as Gujama would emphasize to the common contract we have on ourselves.
 Good morning and welcome to Cintra to the third ECB forum on central banking.  After focusing on more domestic central banking issues in the first two editions of the conference,  we have chosen an international context for this year's forum.  The future of the international monetary and financial architecture, which is of great  relevance given the cross-border interdependencies in which we operate.  We look forward to rich and inspiring discussions as in the previous years.  Let me just shortly clarify our media policy.  All sessions are on the record and can be reported upon live.  All conversations with forum participants taking place on the sidelines of the forum  are strictly off the record.  For those of you who wish to tweet, whether media or here in the audience, our Twitter  account is at ECB forum and there is a hashtag, hashtag ECB forum Cintra.  Let me now give the floor to President Draghi.  President Draghi, in recent years central banks across advanced economies have been engaged  in the same task, namely raising inflation and inflation expectations back to levels  consistent with price stability.  Each has faced conditions particular to its own jurisdiction.  Each has deployed measures appropriate to its own context and each has acted to fulfill  the mandate laid down in its own constitution.  And yet, the fact that all central banks have faced a common challenge of low inflation is  not coincidental.  There are global factors at play and this begs the question, what is the best way for  us to deal with them?  At one extreme, central banks can take global conditions as entirely exogenous and set their  policies accordingly.  At the other extreme is explicit coordination of monetary policies.  In between is a range of informal solutions.  Whatever one's views on these options, what is clear is that the question of the international  dimension of monetary policy is becoming more pertinent since the common factors affecting  central banks are increasing.  Indeed, a growing literature suggests that globalization has created a common factor  in inflation developments which goes beyond fluctuations in energy or commodity prices.  Higher import volumes have increased the importance of international prices and wages relative  to domestic ones, making the global output gap more relevant.  In that context, there are two types of factors that are significant for the global low inflation  environment we face today.  More cyclical factors that have put downward pressure on prices and more structural factors  that have lowered the equilibrium real rate and slowed down the response of the economy  to monetary policy.  The first type of factors includes the large negative output gaps generated by the financial  crisis and its after-month, which still averaged 1% amongst G7 economies today.  This global slack has dampened in particular import and producer price inflation, both  of which have been weak for several years among advanced economies.  These set by producers in the euro area and those set by producers in trading partner  countries are indeed highly correlated.  Also, depressing global inflation has been the slump in demand for energy and commodities  linked to the slowdown in emerging markets.  This has fed not just into lower headline inflation but also into lower underlying inflation  through its effects on costs and imported prices.  Indeed, if one decomposes inflation for the average advanced economy, one finds that since  mid-2014, there has been a notable rise in the global component linked largely to oil  and commodity price falls.  These various factors may originate only in parts of the global economy.  Some originate more in advanced economies, other more in emerging markets.  But in an integrated world, they have global effects.  Cyclical weakness has spilled over through various channels into a similar challenge  for all.  The second type of factors is more structural in nature.  They concern the global forces that have led to very low real equilibrium interest rates  across advanced economies and hence made it more complicated for monetary policy everywhere  to provide the appropriate boost to global demand given an effective lower bound on nominal  interest rates.  In particular, this has led many central banks in the advanced economies to engage in large  scale unconventional policies.  That low interest rate environment is a consequence of global excess of desired savings over  planned investment which results from rising net savings as populations plan for retirement,  from increased demand for and lower supply of safe assets, from relatively less public  capital expenditure in the context of slow in population growth in advanced economies,  from the secular shift from industries intensive in physical capital to those more intensive  in human capital and from a slow down in productivity growth that reduces returns on investment.  Again, those factors may not be distributed homogeneously across economies, but their effects  are global because they propagate through global financial markets.  With internationally mobile capital, the clearing interest rate that balance savings and investment  is more a global concept than a local one.  And accordingly, estimates of the equilibrium interest rate suggest that it is very low,  possibly even negative in the Euro area, the US, and in other advanced economies.  None of this means that central banks should give up on pursuing their domestic price stability  mandates.  We have demonstrated with our unconventional tools that it is possible to engineer accommodative  financial conditions even when the equilibrium interest rate is low.  And we have shown that this can be effective in supporting domestic demand and stocking  domestic price pressures even when these inflationary headwinds are blowing from the global economy.  But the global nature of low inflation does have two important implications.  The first is that operating against persistent headwinds arising from abroad has forced central  banks to deploy monetary policy with more intensity to deliver their mandates.  And that in turn results in higher financial stability risks and spillovers to economic  and financial conditions in other jurisdictions.  Such spillovers are not necessarily all negative for the global economy.  On the contrary, by securing economic and financial stability in their own jurisdictions,  advanced economies also help stabilize other economies through trade and financial linkages.  Empirical evidence suggests that the net spillover effect of the measures taken during the crisis  has been positive, especially at times such as after the Lehman crash when countries have  faced common global shocks.  At the same time, monetary policy has inevitably created destabilizing spillovers as well,  especially when business cycles have been less aligned.  The large exchange rate fluctuations between major currencies and the pressures some emerging  economies have experienced from capital flows are testament to that.  This is not so much a result of the measures central bank have employed, but rather of  the intensity with which they have had to be used.  These negative spillovers have led to a revival of interest in the topic of monetary policy  coordination.  That formal monetary policy coordination is complex for well-known reasons.  Central banks have national mandates, not global ones, and are accountable to their  domestic parliament.  This doesn't mean, however, that we cannot achieve a better global solution than we have  today.  We have seen, for instance, how divergent monetary policies among major central banks  can create uncertainty about future policy intentions, which in turn leads to higher  exchange rate volatility and risk premia.  That then has to be countered with more expansionary monetary policy, increasing spillover effects  for others.  We also know that competitive devaluations are lose-lose for the global economy, since  they lead only to greater market volatility to which other central banks are then forced  to react to defend their domestic mandates.  So we would all clearly benefit from an enhanced understanding among central banks on the relative  paths of monetary policy.  That comes down above all to improving communication over our reaction functions and policy frameworks.  The global economy could also benefit from cooperation among spillover initiating and  spillover receiving economies on how to mitigate unwanted side effects.  One aspect that we need to understand better is how domestic monetary regimes affect the  transmission of foreign monetary policy shocks.  There has been a debate in recent years as to whether the famous trilemma of international  macro has collapsed into dilemma, whereby floating exchange rates no longer guarantee  autonomy for domestic monetary policy, and policy independence is only possible if capital  flows are in fact managed.  But there is also evidence that exchange rate regimes still matter.  Various recent studies support the traditional view that exchange rate flexibility affords  at least some degree of insulation from global shocks.  Another aspect is understanding the role of domestic policies more broadly in mitigating  negative spillovers.  A large body of empirical work in recent years has shown that fiscal, macro prudential, regulatory  and supervisory policies can help mitigate the adverse effects of foreign monetary policy  on domestic financial stability.  Indeed, the relatively recent experience with the so-called taper tantrum in 2013 showed  how differences in domestic policy frameworks shaped how severely different economies were  affected by financial spillovers.  In other words, it has become clearer since the crisis that the famous Timbergen principle,  which we apply at the domestic level, also needs to be applied at the global level.  Policy makers need to have sufficient instruments to deliver on their objectives, and they do  have them, and when they do have them, they must use them.  The second implication of the global nature of low inflation is that there is a common  responsibility for addressing its sources, whatever and wherever their origin.  Indeed, to the extent that the environment in which we operate is more affected by the  global output gap and the global saving investment balance, the speed with which monetary policy  can achieve domestic goals inevitably becomes more dependent on others, on the success of  authorities in other jurisdictions, to also close their domestic output gaps, and on our  collective ability to tackle the secular drivers of global saving and investment balances.  In a recent speech in Brussels, I made a similar point regarding the interaction between monetary  policy and other policies at the domestic level, such as fiscal and structural policies.  And there I maintained that central bank independence could best be described as independence in  interdependence, since monetary policy can always achieve its objective eventually, but  it will do so faster and with less collateral effects if the overall policy mix is consistent.  What I'm saying here is that the same applies to at the global level.  We may not need formal coordination of policies, but we can benefit from alignment of policies.  What I mean by alignment is a shared diagnosis of the root causes of the challenges that  affect us all, and a shared commitment to found our domestic policies on that diagnosis.  Today, for instance, the way in which domestic policies respond to a shortage of demand globally  will vary.  In some cases, the emphasis may be on increasing public investment, in others on supporting  private demand through more growth-friendly tax and regulatory policy, and of course through  monetary policy.  The relative stance of stabilization policies will differ across countries depending on  cyclical positions, but the sign of the effect on global demand needs to be positive.  Similarly, structural policies that aim at raising participation and productivity may  take different forms in different places, but they need to achieve the same outcome,  which is to increase long-term growth rates and raise equilibrium real interest rates.  Where fora such as the G20 can play a useful, perhaps essential role in bringing about the  appropriate alignment of policies, it is key that what is agreed in those fora is translated  in the concrete policy actions.  For example, there is a point in outcome of the G20 commitment to raise global growth  by 2% with structural measures is one example of how intentions and actions can diverge.  It contrasts with the more successful example that was provided by the coordinated global  fiscal expansion in 2008-2009.  Such fora, of course, cannot bind countries into specific actions, but mutual recognition  of their common interests can act as a form of coordination device.  That common interest today is a faster closing of the global output gap, more stable global  inflation, higher long-term global growth, and greater global financial stability.  And such an improved policy mix would help reduce unwanted side effects of monetary policy,  since the burden of stabilization would be better shared across policies.  For instance, in the current environment of global slack, the international spillovers  from growth-friendly fiscal policies are likely to be wholly positive, since they primarily  boost domestic demand in the home country.  That is also true within regions such as the Euro area, where there are different local  output gaps.  The upshot is that in a globalized world, the global policy mix matters, and will likely  matter more as our economies become more integrated.  So we have to think not just about whether our domestic monetary policies are appropriate,  but whether they are properly aligned across jurisdictions.  We have to think not just about the composition of policies within our jurisdictions, but  about the global composition that can maximize the effects of monetary policy so that our  respective mandates can best be delivered without overburdening further monetary policy,  and so as to limit any destabilizing spillovers.  This is not a preference or a choice.  It's simply the new reality we face.  Thank you.  Thank you.  So before we start the sessions, let me just draw your attention to the electronic posters  by the 10 young economists that we have selected among a number of applications like in the  last two years, and they'll be on display.  You may have seen them already in the foyer.  Please take a look at them, take the time to discuss with the economists, and then place  your ratings by the iPads.  The results of your voting, the results of the iPad voting, will be valued together with  the assessment of the selection committee, and the winner will be awarded a prize at  the end of the conference tomorrow.  Coming to the iPads, all available conference material is uploaded onto the iPads, which  are for use in the conference venue only.  They won't work outside.  However, we've also taken feedback from last year that you wanted to be able to have printouts,  so if you wish to have printouts of any of the materials, please ask our team and you  can get that.  When we start now with the panel discussions today and also tomorrow, you will have the  possibility of actively participating in the debate by answering live some questions posed  by the chairs.  For that, take your iPads and go to the polling menu, and you will have roughly a minute to  answer the questions, after which we'll show the results on the screen, and you have all  the information there.  At the end of the conference, we would also very much appreciate your answering a very  short survey.  As I said, we benefit from your comments and we improve.  It's only four questions in two comment boxes, and then you can also access that via the  feedback tab.  I will now hand over and give the floor to Benoit Corré, who will chair the first session,  macroeconomic and monetary challenges.  After the presentation of the papers and the subsequent discussions, the floor will be  open for the questions.  And to help the speakers, traffic lights.  We do have to keep a bit of time.  Traffic light signal will show you the end of the time at your disposal.  Please be mindful of the assigned times, and otherwise the chair will keep an eye on it,  and if not, we will.  Thank you very much.  Thank you very much, Christine, and good morning to all of you.  So let me open this session on macroeconomic and monetary challenges, and let me first  reassure the speakers and commenters that there is no voting on their presentations.  So voting will be laid for later.  So that's a session on macroeconomic and monetary challenges, which maybe could have been more  aptly titled from, borrowing from the title of Barry's paper, which will be the global  monetary order, because that's what we're going to discuss globally and regionally or  locally.  And that's a common theme.  And Barry very rightly starts his paper saying that the notion of a global monetary order  sounds somehow like an oxymoron, given what we know of the performance of the global monetary  and financial system over the last 50 years.  And when reading this remark by Barry, it made me think of this famous quip by the Mahatma  Gandhi when he was asked about his views on the Western civilization, and he said, oh,  that would be a very good idea.  So the global monetary order is a little bit the same question, and we'll be interested  in hearing the answer.  When you think about the properties or objectives, you would expect the global monetary order  to deliver.  There are mainly two.  You would expect it to deliver efficient allocation of resources, and you would expect it to deliver  stabilization, risk diversification, insurance against shocks, and mitigation of shocks.  And of course, central bankers are mostly interested in the second discussion.  Well, we are not indifferent to the good allocation of resources, but this is by and large not  within our instruments, within our domain, while we have to focus very much on shock  absorption.  And the fact that we're having that discussion today after the European and global economy  was hit by a major shock is relevant and topical.  And I guess the starting point of the discussion is that a lot of the recent academic literature  has challenged the shock absorbing capacities of the global monetary system as it is, both  in terms of flexible exchange rates, freely moving capital flows, et cetera.  So we're very impatient to hear about your latest thoughts about the issue.  You know how the sessions are organized here in Sintra.  There will be two presentations.  So the first one by Barry on the global monetary order will then be discussed by Guillermo  Calvo.  And then we'll have a second presentation by Pierre Olivier, actually based on a paper,  on a joint paper by Pierre Olivier and Elen Ray, who's also here and who's welcome to  jump in at any point.  Not contradicting too much Pierre Olivier, hopefully, but certainly in the discussion.  Well, that's a fairly long title that you can see here, imbalances, safe assets, and  the like.  And David will discuss it, and then we'll have a broader discussion.  So with a due delay, let me give the floor to Barry.  Thank you, Benoît, and thank you to the European Central Bank for the invitation to this gorgeous  venue.  Thank you to the European Central Bank for the title.  So the title was given me.  I have a tendency to take my titles too literally, but this one did provoke me into thinking  whether it's appropriate to contemplate the existence of such a thing as a global monetary  order or whether we might better think of the current situation as global monetary disorder.  My skepticism is perhaps underscored by the events of the last five days.  The definition of order I found in the Merriam-Webster dictionary online is an arrangement of items  in relation to one another according to a particular sequence pattern or method.  So it's not outlandish to think about elements of an international monetary order given that  definition.  The exchange rate arrangements operated by different countries are not entirely without  logic.  One can perhaps discern a pattern or method in their choices.  It's possible to find elements of order in policies toward international capital flows,  which include in different countries restrictions on transactions on capital account adjustments  and macroeconomic policies in response to those flows.  And more recently, the adoption of macroprudential measures.  It's possible to discern elements of order in the provision of international liquidity  denominated mainly in a handful of leading national currencies that are created in deep  and liquid markets and used internationally.  So I've just snuck in my definition of international liquidity for the discussion that will follow.  And it's possible to discern elements of order in how oversight of these aforementioned items  is provided through the International Monetary Fund, but also through a variety of other  regional, mainly regional entities.  At the same time, clearly we see elements of disorder.  My same source defines disorder as a confused or messy state.  So that's not an entirely irrelevant definition from the point of view of global monetary  affairs.  So if you have not read the paper, you are about to be at sea because it's full of facts  and information and analysis.  It's my attempt to get my own mind around the current state of affairs and scholarship  on issues like exchange rates, capital flows, international liquidity, and the global safety  net.  I've touched on a few highlights in my remaining 20 minutes, mainly focusing on the international  liquidity aspect, which I think my discussion will then elaborate further and some issues  related to the global safety net.  There is a conventional wisdom about monetary frameworks, which is that a growing number  of central banks around the world are turning towards something that we might label flexible  inflation targeting or post-crisis, extended inflation targeting.  It's hard to find evidence of that in the global data.  If you look at what the IMF reports in terms of self-declared monetary frameworks in its  member countries, you will see, perhaps to your surprise, that there has been no decline  in the share of countries globally that practice monetary aggregate targeting.  Also surprisingly, there has been no increase in the share of countries globally.  This is, since roughly speaking the pre-crisis period, the share of countries engaged in  inflation targeting.  Again, I think that's somewhat surprising relative to the conventional wisdom relative  to the fashion for inflation targeting.  Surprising given the fact that inflation targeting seems to resemble an absorbing state that once  central banks adopt inflation targets, it's hard to find an example of a country that  has abandoned those that target.  What we see in the data is a growing share of monetary frameworks concentrated almost  entirely in other arrangements that are difficult to place under any of the aforementioned categories,  arrangements operated by countries that either do not specify their framework or else they  declare that they formulate policy with reference to, quote, an eclectic mix of indicators.  So economists, academic economists tend to be purists.  Evidently, central banks do not.  Similarly with exchange rate arrangements, the data on IMF classification of de facto  exchange rate regimes suggests, again, contrary to conventional wisdom, that there has been  little tendency to abandon intermediate regimes since the crisis.  There has been a rise in the share of countries operating so-called hard pegs, but that reflects  almost entirely the accession of additional countries to the euro area as opposed to a  global phenomenon.  There has also in fact been a rise in the share of countries operating intermediate  regimes due almost entirely to an increase in countries operating crawling pegs.  So the conclusion side draw from this are two.  Number one, that it remains the case that academic advocacy of floating notwithstanding  the prerequisites for the successful operation of a freely floating exchange rate are daunting.  They include deep and liquid financial markets, supervision and regulation capable of limiting  currency mismatches, and a clear and credible policy framework that does not revolve around  the exchange rate, something that not a lot of countries even today can claim.  Number two, I conclude that a global monetary order based on free floating is no more realistic  than a return to Bretton Woods-style global system of hard pegs.  I will not talk much about, talk further about de facto exchange rate behavior other than  to say the approach Shang-Jean Wei who is here has taken suggests similarly that we  are moving toward a more eclectic multipolar system where different countries manage their  exchange rates in rather different ways.  Can be argued nonetheless that countries have made progress if not through changes in their  exchange rate arrangements, through changes in accompanying policies in dealing with the  currency crisis problem.  So I show you here a time series bar graph of one measure of currency crisis conventional  from the literature instances in which the exchange rate depreciates by at least 20 percent  against a reference currency between successive quarters and does not recover by 5 percent  or more in the subsequent quarter.  This figure I write in the slide is a bit of a Rorschach test, I think different people  will read it differently.  I read it as suggesting that we have made progress in terms of addressing the currency  crisis problem since the 1990s.  What observe in passing that what has happened to sterling in the last five days doesn't  rise to the level of a currency crisis according to the definition I use, doesn't rise yet  to the level of a currency crisis according to the definition I use in the paper.  More generally though we clearly have not succeeded in making a lot of headway on the  crisis problem.  So here I have updated through 2015 for 181 IMF members the various conventional indicators  from the literature of banking currency sovereign debt crises and growth crises or collapses  with more time I would provide more discussion.  But I do think one can read this table as suggesting that intermediate regimes as categorized  here not independent floats not hard pegs are especially crisis prone.  So there is a tension between that fact and observed preference of many countries to continue  to operate intermediate regimes.  The paper then provides a fairly extensive analysis of international capital flows consistent  with the mandate I was given.  I would make basically only two points for this discussion.  Number one capital flow volatility variously measured I measure it in a variety of ways  in the paper remains a first order problem and what seems to have changed over time is  that what was once predominantly an emerging market and developing country problem is increasingly  an advanced country problem as well the same indicators of capital flow volatility that  were once primarily evident or most evident in emerging markets are increasingly evident  in the data for advanced countries as well.  And number two the capital flow problem and capital flow volatility problem is taking  on a new aspect that we still don't understand very well.  What's the corporate debt aspect.  We all have a lot of experience analyzing discussing sovereign debt problems.  We have much less understanding I would submit of the corporate debt problem which is the  new aspect in the increasingly troubling one.  Do we understand well why why corporates in so many countries have accumulated such high  levels of debt that now pose increasingly a problem for economic and financial stability.  I would submit that the answer is no that we don't have good models and good understanding  of why corporations are now suddenly to a much greater extent than before getting into  debt problems that pose a problem for the global system.  Maybe it's the case that emerging markets have made more progress strengthening government  budgets than strengthening corporate governance which allows corporate borrowers to systematically  underestimate the risks of foreign currency borrowing.  Maybe international investors underestimate the risk of default by corporates with foreign  currency debts when the borrowers currency depreciates.  The non-financial corporations in emerging markets are arbitraging the new regulations  that you all have placed on the activities of financial institutions.  The closest I think there is to a synthesis is that emerging market corporates have been  encouraged to borrow in foreign currency by unprecedentedly low interest rates in countries  engaged in quantitative easing.  They're prepared to incur those foreign currency exposures and foreign creditors are willing  to lend to them perhaps because emerging market countries have accumulated massive foreign  currency reserves which they will use to pay off those debts in the event of extreme events.  Those are some conjectures, some hypotheses about what's going on here, but I would reiterate  I think this is an aspect of the global monetary order that is not yet well understood.  It and the capital flow volatility problem more generally continues to give rise to sudden  stops, a term given currency by my commentator among others.  Here I define sudden stops as episodes in which portfolio and other inflows by non-residents  decline below the average in the previous 20 quarters by at least one standard deviation  and they stay lower and I look at the comparison between the first half of the period for which  data on flows through international bond markets are available and the second half of the period.  What has changed recently if anything and the remarkable fact is that very little has  changed.  The frequency of sudden stops has not changed.  The output drop that occurs in the wake of sudden stops has not changed between the  first half of the period and the second half.  There has been progress on the policy front.  You all have done a variety of things to try to strengthen the management of international  capital flows, macro prudential regulation and the like and yet you haven't reduced  noticeably the incidence or impact on the macro economy of sudden stops.  My interpretation is that capital flows have grown and the capital flow volatility problem  has continued to grow to an extent that it has largely offset the destabilizing in terms  of destabilizing macroeconomic impacts, any improvement that has been made on the policy  front.  The international liquidity problem, as I said before, I would define international  liquidity as resources that are widely accepted internationally in settlement of cross-border  transactions.  They are held as reserves.  They provide pricing benchmarks.  They're regarded as reliable stores of value.  They're accepted as collateral in financial transactions.  They satisfy prudential requirements.  They are the grease for the wheels of cross-border trade and payments for 21st century globalization.  One hypothesis, one potential explanation for the slowdown in the growth of trade and  cross-border capital flows is the shortage of international liquidity.  To try to operationalize that idea, test that hypothesis, you need a measure of international  liquidity.  So here's one.  What I've done is to sum for the OECD countries high-powered money and safe CRIPA and double  A rated central government bonds, the bonds of super nationals like the EBRD and the World  Bank and gold in official and private hands.  If you scale that by global GDP, it has fallen by nearly half from the peak at the global  financial crisis, reflecting credit rating downgrades for a variety of OECD countries  primarily and the growth of the denominator of this international liquidity to global  GDP ratio.  Finally the global financial safety net.  There has been some progress in building it.  I show you a measure of it here.  The sum of foreign exchange reserves, IMF facilities, central bank swap lines, standing  swap lines and regional financial relationships, I would make two observations.  Number one, while it has risen, it has plateaued.  And number two, we continue to rely as an international financial community on international  reserves held at the domestic level primarily as the dominant constituency of the global  financial safety net.  I would suggest in addition that there is less here than meets the eye.  These are reluctant to use their reserves.  What the IMF defines as the maximum reserves that countries need tends to be increasingly  defined by the markets as the minimum that is prudent, which I think is a misunderstanding  but which in practice immobilizes much of the international reserves that central banks  hold.  The problem of IMF stigma evidently remains that stigma problem seems to apply also to  drawing on regional financial arrangements like the Chiang Mai initiative, multilateralization  and bilateral swaps.  An interesting exception is federal reserve bilateral swaps.  Central banks are willing to actually draw on those and use them.  So there is a question we need to ask about why the stigma problem that seems to apply  in many other contexts does not also apply to federal reserve swaps.  And I suggest here that a conjecture is that these are extended mainly by an apolitical  entity, echoing some things Alan said last night, namely an independent central bank.  Or federal reserve swaps don't come lumbered with political conditions and obligations,  whereas IMF and CMIM support comes from institutions that are directly answerable to and perceived  as carrying out the bidding of governments and the stigma.  These four reform let me suggest some highlights and write my remaining minute.  I think people who write about international monetary reform tend to fall temperamentally  into two camps, radical reformers and incrementalists.  So I'm squarely in the not so radical reform camp.  And I would suggest focusing on the following.  First, using policy incentives to address the volatility of capital flows by attempting  to shift their composition from short to long term from debt to equity and to do that by  using tax codes at the national level to make debt, less attractive, changing prudential  regulation to make debt and short term obligations more costly, strengthening corporate governance,  supporting in place proper insolvency regimes to help address the emerging corporate debt  problems emerging in two senses.  Number two, continue to rationalize exchange rate regimes by moving away from the unstable  middle.  I wrote a book about this in 1994 and I remain wedded to that argument.  I think Europe reminds us that a hard peg is one option, but that the preconditions for  making it work are formidable for the vast majority of countries.  The other alternative of freer floating is more clearly feasible.  I think Guillermo has written that floating is not a monetary regime.  It is the absence of a monetary regime and moving away from an exchange rate anchor requires  you to put another anchor in place.  Inflation targeting, in my view, is the best we have.  And there is evidence that exchange rates between pairs of inflation targeting economies  are more stable than otherwise comparable exchange rates.  So inflation targeting can obliquely at least address some of the ills of the international  monetary order.  Third, address global liquidity needs in the short run.  That has to be done at the national level where credit downgrades have robbed some national  bond markets of their liquidity.  Those problems need to be addressed at the national level.  I think international liquidity can potentially be augmented by allowing experimenting with  limited allocation of SDRs directly to central banks rather than to governments directly  to central banks in a manner that will actually add to liquidity rather than simply transferring  it from one set of hands to another.  Another way of going about the same thing would be to experiment with limited authorization  for the IMF to borrow on capital markets to fund liquidity provision.  And a final possibility is to allow the fund to experiment with a pooling of sovereign  bonds in the same manner that in Europe you talk about possible ways of pooling the sovereign  debts of different countries in order to create a higher quality composite that will be more  widely accepted and more liquid.  As a result, fourth and finally, enhance the global safety net by pre-qualifying countries  unilaterally for IMF facilities and trying to address the problem of IMF stigma.  So my own analysis of the problem of IMF stigma is that it has to do with the lack of political  distance between the fund and its dominant shareholders.  I have an old proposal together with Charles Wiplos who is here in the audience about how  the IMF might be made more independent at least to choose its tactics and more distance might  be placed between management and the Board of Governors.  I think thinking seriously about moving in that direction is necessary if we want to  address this problem of IMF stigma.  Thank you very much.  Thank you very much, Barry.  So the floor is to Guillermo for the discussion.  Thank you very much for the invitation.  It's an honor to be here and I really enjoyed reading Barry's paper.  But I had to make a very hard decision whether to focus on the paper itself or try to just  take one or two points and elaborate on ideas on which I've been thinking lately.  And probably I decided the latter because hopefully we'll enrich the discussion.  So I will focus on the issue of liquidity.  Let me see if I know how to operate this.  And the first, there we are.  So liquidity and so let me talk a little bit about illusions because that's how liquidity  came into the attention of economies.  And the first one is familiar to everybody.  It's money illusion.  It's a term that was very popular in the series.  Erwin Fischer has a book about that.  And even Lukas has relied his analysis, his famous early papers on the assumption that  there is an illusion.  This is W, the wage, P is the price level, the illusion is on P.  So we don't know very well about P. So let me talk about P as a kind of an illusion.  That's what's been emphasized in Fischer and obviously in Lukas' early papers.  Now, nowadays, we are sort of going back to stuff that was discussed by Triffin.  I call it the liquidity illusion where now we have real monetary balance is there.  The illusion is on M. So M is, we usually call it money in our models.  But the thing is that in practice, we don't know very much what it is.  So whether we have a monopoly as Alan was talking about yesterday or not, there's a  problem with M. There are lots of copycats out there.  So in the US, M was abandoned in the beginning of the 80s in favor of the interest rate because  the Fed concluded that it did not very well what was relevant M anymore.  And so we chose I, the nominal interest rate, and now fast forward 2008 and we find that  I doesn't work either.  So we go back to M. But we really don't know what M is.  We haven't done a lot of analysis on M. So that's where we are.  That's the central point that I want to make.  So we can talk, we see the relevance of M, but we don't understand it very well.  Now in the meantime, we've seen some liquidity illusions that were broken.  For example, illustrated by the asset back securities, the haircut index, how it sort  of jumped up around 2008.  So some assets that were considered highly liquid all of a sudden became much less liquid.  Now if I apply this to the euro, the equivalent haircut of the euro, well, we have a picture  where the haircut is not, this is from 2014 to 2013, it doesn't not reach 40%, but it's  20%.  So I look at the euro, if I think of a world where the dollar is the center, is a king,  liquidity king.  So in reference to that, the ABS became a very fragile security in terms of that sort  of liquidity.  And when you think about it in terms of the euro and now the pound, from that perspective,  assuming that the dominant concept for liquidity is dollar liquidity because it's the area  that it covers, et cetera, then having float in a general rate is kind of accepting that  there are other assets which are important out there that could be quite fragile.  In terms of dollar.  So if you take that perspective, right, so from that, I mean, from that perspective,  by the way, the asset pack securities became kind of dubious liquidity objects, right?  So that's where I'm trying to establish some sort of parallel.  But don't take me literally.  I'm just saying if you start from that angle, all of a sudden having float in a general  rate, having these very sharp devaluations that we have seen and that are not anticipated  and that are given partly by the market sometimes and even political considerations.  We live in a world where liquidity is hard to define because things start to move around  a lot.  You have to take into account volatility, but what kind of volatility?  I don't have time to elaborate on that.  So this is the first point that under the present conditions, international liquidity  as a concept is hard to assess.  And one wonders in that context whether floating exchange rates freely float in exchange rates,  if we think that liquidity is important for the functioning of the international economy,  whether that's going to be very desirable over the long run.  We know what the central banks do in order to perhaps preserve the stability, obviously,  and also facilitate liquidity.  There are these currency swaps.  So here I only have a question.  Is the currency swap a good substitute for Bretton Woods II or some sort of narrow bands  and stuff like that?  I have a question only, but obviously central banks have react to that.  And the first reaction I heard from the Fed the other day is that they were ready to be  the lenders of that resort if necessary.  So there is a bit of sensitivity to excessive volatility and the impact that that may have  and one of which could be the liquidity impact.  And then there are questions that Taylor, for example, suggests that maybe you don't  want to go to Bretton Woods II, but if you have Taylor type rules of some sort agreed  upon that could sort of give some more predictability.  I have the feeling now that we talk about floating exchange rate and Barry mentioned  something I said many years ago about floating doesn't mean anything because it simply says  that you don't fix.  So what does it mean to float?  The poor guy in the street doesn't know what you're talking about.  When are you going to intervene?  How much volatility are you going to allow?  Just saying that the central banks will get together and start throwing these swaps around  is not a lot of information.  You are making something which if we think it is central, now if you think that the financial  market substitutes for money that now we live in a world where money is irrelevant, that's  fine.  But if you need the support of liquidity stuff, then I think that's a point where we want  to think more about it and have an answer.  Now in relation to that, I'm sort of reinforcing this.  Let me bring up the issue of helicopter money which has become very popular and the limits  of that.  Now I have not coordinated with Alan about this, but he's the same guy as you see.  So the question is why and we talk about the dollar as something which is strong, which  is quite surprising because that's nothing, that's a piece of dirty paper.  Sorry to say it.  So how come we are so confident about the dollar?  No, of course the answer is not the musical.  Although obviously it must have made it more popular than it was.  He has an answer because obviously he was very concerned about the liquidity trap.  And that's an answer you can find that on chapter 17 of the general theory that economists,  I don't think economists have paid attention to this.  The bottom line is that sticky prices is what makes the difference.  And we said our prices in terms of dollars.  We don't set our prices in terms of ABS.  We don't set our prices in terms of any security which is considered liquid in the United States.  It's the dollar, and the dollar is in many other places in the world.  So that's the advantage of the dollar.  And that's an interesting, I find it very interesting conjecture because the more popular  one is that the fisk will come and do something if necessary.  But you don't need the fisk.  Really it is us who are providing the support for the dollar.  So kind of jokingly, maybe we should put on the back of the...  Not only in God we trust.  But I think that kind of important.  So that conjecture I call the price theory of money to turn it around.  So sticky prices used to be a nuisance.  Under these perspectives, sticky prices are the cornerstone of a monetary system.  We have money because we have sticky prices under this perspective.  If prices were totally volatile, I don't know what sense money would have.  Because as we have, I mean, some analytical results are there showing that the general  equilibrium model, there is always an equilibrium where the price of money is equal to zero.  Because if it is zero, nobody wants the money.  So it is an equilibrium.  So that equilibrium would be present there.  Prices were perfectly flexible.  But they are not.  So that's the whole topic for discussion there.  I have a book coming up discussing some of these issues.  So the price theory of money helps to sort of give a basis.  Some understand what that thing is so strong.  But also raises other questions because the price theory of money, even if you take this  literally, if you think it is relevant, I mean, it's not everything.  So if you start putting up things on the dollar, I mean, fixed income securities on the dollar,  then there's a whole pyramid of things on top of that.  Obviously, the dollar has some support, not for everything else.  So when you think of it that way, all of a sudden, then you start worrying about whether  that is strong enough to support, could we have a run?  That was Trifin's problem.  Of course, under his way of thinking about this, I mean, he was writing in a period where  the dollar was pegged to the gold.  So it's an additional complication.  But even if it is not pegged to the gold, the question still is whether these currencies  where I have the dollar and the euro, very strong currencies in principle because are  many, many people and firms setting their prices in a sticky way in dollars and euros.  There's still the question of whether you could not be at some point overburdening the  support of money.  And that's where you come to think about the QE as something that may be very effective  for a while.  But if you keep pushing, maybe there are decreasing marginal returns to QE.  And I think that's kind of relevant because it's one of the topics that we discussed.  But if we don't put that, if we don't have a rationale for why that dirty piece of paper  has value, we cannot go anywhere because that's my feeling that much of the discussion we  talk about safe assets.  I know from a practical point of view, I mean, it's quite clear we would agree that there  are safe assets and so on.  But what makes them safe?  And if among those safe assets, the dollar bills are safe, then that's very hard to explain  except if you buy the...  Now let me just finish with a couple of things.  A negative interest rate from the point of view of liquidity, well, you know, a negative  interest rate is an inflation tax.  And whether that's good for the quality of liquidity, I don't know.  It increases the cost of collateral.  You make the collateral less attractive.  So it all depends when you put liquidity in the demand side or the supply side.  And the presentation that Barry made, he referred to collateral.  If the liquidity is important for collateral and you have negative interest rates on liquidity,  then you make it more costly, the collateral.  And it could become productive from a supply point of view.  And also just something more practical, using the interest rate, the models that we have,  I think they are very misleading.  They are simple, they are being very useful, but for these occasions where liquidity plays  a central role, I would be very careful.  The neo-Kenshin model assumes that the interest rate goes directly into the Euler equation,  that is to say, goes into the vein.  There is no intermediation, the liquidity doesn't bother you.  You can control interest rate and it goes into the investment function right away.  But if the interest rate also reflects problems of liquidity, you may change the interest  rate and not have a very big impact on decisions of consumption and investment.  So maybe you had to push it down a lot and remember what the worker had to do in the  1980s, going to minus 20 percent of course is almost unthinkable.  But that's something that we should factor in the discussion.  For emerging markets, this very quickly, I agree that we have to think of ways.  There is a problem of stigma, I almost finished, I promise.  There is a problem of hard capital into emerging markets.  We have some work in the past, 1993 paper with Carmen Reicher and Leo Ledermann about  the sensitivity of capital flows to the interest rates in the US.  So the short-term interest rate in the US, so my reading of that is that capital, what  we call hard capital is capital that is looking for some place to park liquidity.  So that's why it is so sensitive to interest rates.  So what to do about it?  And I'm suggesting to think about what I call the emerging market fund, which would be a  fund that would help to stabilize an index.  And it could be run by the IMF.  I don't have time to enter into details, but one advantage of something like this is that  it may help to bypass the stigma problem.  Number one, because it provides liquidity to an asset class and is triggered by the  IMF, it's not that the country comes forward and asks for support.  What is the inspiration behind this is the 1998 crisis, some people call it the Reich,  or the Russia crisis that triggered a very big impact on all the emerging markets.  There was a lot of contagion going on there, so maybe there is a fund that sort of stabilizes  as the central bank, the advanced economy central bank did in 2008.  And in my mind, it helped to recover quite quickly the emerging market that did not happen.  In 1998, it took about four years for the MB to go back to what it was before the crisis.  So these are my comments and apologies for taking more than my time.  Thank you very much.  So Barry will have the opportunity to comment when we start the overall discussion.  So let me just turn to Pierre Olivier.  Okay, well, thank you very much.  It's really a pleasure to be here, this wonderful event organized by the ECB.  And I guess my slides will be coming up shortly.  While they are coming up, I can tell you one thing, unlike Barry, the title of the presentation  was not given to us by the European Central Bank.  In fact, we received a very general invitation and the topic to work on, which we dutifully  ignored and started to work on the things we thought Dylan and I were interesting.  And what was really quite remarkable is that at the end of the day after we finished and  went back to what the ECB and the organizers that asked us to focus on, we were remarkably  closed.  To me, this is telling us that the kind of issues that are on the front of our mind are  the same as the ones that the ECB is concerned about.  Okay, so now that I've...  Ah, there we go.  Thank you very much.  So this is work I've done with Ellen Ray who is here.  And it has a long title, real interest rates, imbalances, and the curse of regional safe  asset providers, which sounds like a Harry Potter volume, but is not.  What we are doing here is we're thinking about three questions that have been mentioned  already in the introductory remark by Mario Draghi earlier this morning.  First, what can we say about global real interest rates and why are they so low, especially  when we think about real rates, and for how long are they going to remain low?  And here, there have been a number of explanations that have been put forward.  Larry Summers recently in a speech at the IMF revived an old idea, the idea of secular  stagnation that was first written about by Alvin Anson in the late 1930s.  There is also, there are explanations based on the excess of desired savings over investment  and the saving gluts that results from this that go back to Ben Bernanke's very famous  speech in 2005.  So we're going to have to say something about this.  And then we're going to turn around and say, well, if we understand a little bit better  what's going on with low real interest rates, then what does it tell us about the pattern  of global imbalances and how they're going to evolve over time?  And one view was that global imbalances arose from rapid growth in emerging market economies  in part, maybe in the 2000s.  And so if we are in an environment of lower growth, then should we expect these global  imbalances to somehow resolve themselves or not?  And here, we're going to have a somewhat negative answer.  And then we're going to narrow down the focus and look at safe asset providers.  Already today we've discussed in various presentation that's touched upon the issue of safe asset  scarcity.  And we're going to ask specifically, when we look at regional safe asset providers, the  kind of trade-off that they're facing and the kind of difficulties that may arise from  this.  So this is a picture that everyone has in the back of their mind.  This is nominal 10-year yields, long-term rates here for the US, Germany, the United  Kingdom and Japan since the 1980s.  And we all know they've been declining.  We all know that the decline is not just because of the decline in inflation over that period,  but also decline in real rates.  Now if we take a longer historical perspective, here's the US real rate.  This is a short real rate going back to 1870.  And you can see on this graph here that this is a 1980 to 2015 period.  This is a decline you just saw on the previous graph.  But if we go back in time, we see that this is not the first time real rates have been  low or negative in the 1970s.  They've been briefly low as well.  But more importantly, they've been fluctuating.  And historically they've been periods in which they've been high and periods in which they've  been low.  And so we're going to try to understand what happens to real rate from that sort of long  historical perspective.  And so what we're going to be doing here is to shed some light on this issue, we're going  to look at a ratio which we believe is important, which is, if you want, if you think of this  as the average propensity to consume out of wealth.  So we're going to construct a measure of aggregate consumption.  We'll try to make it global by thinking about, well, mostly constrained by the data we have.  So we'll be looking at the US, the UK, Germany and France.  That's the countries for which we can get consumption and wealth data going back to the early part  of the century.  And for which we're going to be constructing this ratio.  And I want to bore you with the details of the empirical exercise.  Just going to try to give you the insight for what we're doing.  So this is this consumption wealth ratio.  Where wealth here is a measure of not only your financial wealth, but also lands, building,  agricultural land, residential housing, et cetera.  So this is a graph of this consumption wealth ratio going back to 1920 year.  Again for the average of these four countries, the US, the UK, Germany and France.  And you see that there are periods during which this ratio is low and then it goes up  and then it comes back down again.  Now I want to point your attention to one thing, which is the period during which it  was low here was exactly in the 1930s when Alvin Anson was writing about secular stagnation.  And the period during which it is low again here is in the 2000s when Larry Summers was  writing about secular stagnation.  And I'm not going to claim that this is not entirely a coincidence.  In fact if you think about what's driving this ratio here, you can think about why would  the ratio of consumption to wealth fall.  So what will happen when there is a very rapid increase in wealth, the denominator in this  ratio.  And so that usually tends to follow periods of rapid increase in asset prices.  So financial bubbles or a very rapid increase in financial prices.  So you see that in the 1920s of course and then you see it again in the 2000 with first  an asset price increase and then the residential housing that increases.  So what happens after that?  We have a crisis.  And after that crisis what we see is this ratio because of the crisis wealth is going  to fall so the ratio is going to bounce back but not completely.  And why is that?  Well because at that point the workings of this financial crisis is going to depress  consumption and activity for a while.  So consumption and wealth ratio is going to remain low for an extended period of time.  And while this consumption and wealth ratio is remaining low, every agent in the economy  is trying to repair their balance sheet, households, corporate sector, the financial institutions,  the governments, everyone is trying to save.  Or you can anticipate what this is going to do to interest rates.  It means that we're going to have an extended period of low interest rate.  So this is why this ratio is particularly interesting when we want to look at this sort  of low frequency movements in interest rates.  Now as I said I'm not going to bore you with the details of our empirical exercise but  let's just say that we're going to be able to decompose this consumption and wealth  ratio into three components.  One is going to be something that is due to future risk free rates.  That's this red part here.  Another part is going to be something that has to do with the risky part of the return  on wealth.  So think of this as a risk premium component, the risky return relative to the risk free  rate.  And then there's another part that's related to consumption growth itself because that  also is the numerator of this ratio.  That also can influence how this ratio moves over time.  And we're going to do a decomposition exercise.  Here's this ratio again.  I've taken logs and I've demeaned it so it's around zero.  And first I want to show you that our empirical exercise is going to do a fantastic job of  accounting for what we see in the data.  This gray line I just superimposed on it.  This is our predicted consumption wealth ratio.  In other words the right hand side of this decomposition I showed you.  So we're able to capture most of the movements in consumption wealth.  Now we can turn around and we can ask okay well where is it coming from?  And it's coming mostly from this red component which is future risk free interest rates.  So consumption wealth ratio encodes a lot of information about future interest rates.  If I ask okay what is coming from the risk premium, the return on risky assets, almost  nothing.  What is coming from consumption growth which is a combination if you want of productivity  growth in the future and population growth in the future because this is total consumption.  There is a little bit there but there isn't really that much.  So our conclusion from this exercise is that we have a lot of information in this variable  and it's telling us that a lot of the movements in consumption wealth are driven by this boom  bust financial cycles that we had in the 1930s here and we had again in the 2000s.  And perhaps less so or at least we cannot tell really for sure how much we have coming  from a slow down in productivity growth or maybe how much is coming from demographic  trends.  What we see very clearly is the financial boom bust cycle at the global level.  Now we turn around and we ask okay well if this is useful, if this contains a lot of  information about interest rates can we predict interest rates with this?  And the answer is yes.  So here on this graph is the average of the short term risk free rate, this is an average  for the US and the UK, Germany and France the data is a little bit more murky because  especially in the 1920s there were a few episodes of very very strong price instability.  But if we look at countries that didn't have hyperinflation episodes or very strong inflation  episodes this is the average of the tenure at every point in time and in red this is  our forecast of what the interest rate would have been at that point in time for the next  ten years.  You can see that we are capturing a lot of the movement in the future rates.  And what does it tell us here at the end of the sample?  This is in 2011, well it's telling us that the risk free rate we can anticipate from  this exercise is going to be about between negative 2% in real terms and zero for the  following ten years, so until 2021.  So the conclusion from our exercise is real rates are low, they are going to remain low,  that's going to be largely driven by the aftermath of the financial crisis and the deleveraging  processes that are at play in the world economy.  So that's the first part of our exercise and this is just summarizing what I just said.  Okay, so now let me turn to global imbalances.  So global imbalances I'm going to start with this graph which most of you I'm sure have  seen in one form or another.  This is a plot of current account surpluses above the zero line or deficits below the  zero line scaled by world GDP so everything is in the same units in some sense, four  various countries and regions of the world.  And in red of course we have the US current account whose pattern we know very well so  pattern deficits are increasing until the financial crisis and then our receding they're divided  by factor two about but they have not disappeared.  So the current account deficits of the US are about slightly above 0.5% of world GDP as  of 2015.  Now what happens on the funding side?  Well something very interesting has happened on the funding side.  If you look at two things that happened on the funding side.  First is gray bar here, those are the oil producing countries and what we see is the  oil producing countries are surpluses have largely vanished actually predicted to be  a small negative number in 2015 according to the world economic outlook data.  Even more interesting is the green bars here that's the eurozone and this is for the constant  geography of the eurozone with 12 members.  The eurozone surpluses have been increasing very, very sharply and especially since the  onset of the eurozone crisis.  And what we see here is that towards the end of the sample they are larger than the surpluses  of China or Japan or almost anyone else in the world economy.  Now if you zoom in on this green bar here and you look more specifically at the eurozone  current account balances if they come up which they don't.  So I see someone is moving an arrow in the background so frantically trying to solve  the little technical problem here but let me continue and hope that there he goes.  Well this is the same geographical distribution of current account balances for the eurozone  countries but now scaled by eurozone GDP and what you see here the striking fact is as  of 2014 and 15 we don't have any deficit countries anymore or you know to a first order tiny,  tiny deficits but they don't really matter.  So we have this huge swing into surplus that's mostly coming from the elimination of the  deficits for all the deficit countries back from the first part of the 2000s.  Now what's interesting is in this environment of very low interest rates the pattern of  global imbalances doesn't become less important low interest rates and low growth.  In fact if anything it becomes more perverse and what we call in some work I've done with  Emmanuel Farri and Ricardo Caballero what we say is the imbalances mutate from being  relatively benign to malign at the zero lower bound.  And the reason for this is if you think about regions or countries with large surpluses  what they do is they push down global equilibrium interest rates in normal times but once you  hit the zero lower bound that equilibrating mechanism doesn't work anymore and at that  point what takes its place is a global recession.  So excess saving in some regions of the world when we're closer to the zero lower bound  can push the global economy into a recession.  And not only that but in that environment there is one variable that takes a very important  role and that's the exchange rate because through movements in the exchange rate countries  or regions can try to capture a share of a world aggregate demand that remains too depressed  but they can try to capture it at the expense of other countries.  So we have a very very real potential for currency wars.  Now if we turn around and ask ourselves okay I told you first that we have this low interest  rate because of this financial boom bust we are in the process where a lot of economic  agents want to have old safe and liquid assets then let's focus a little bit on the providers  of these assets.  Well first we know that if these assets are relatively scarce then their price will be  high that's just another way of saying that interest rates will be low.  Now we also know that the suppliers of these assets are going to enjoy a funding advantage  because they're providing these assets to the rest of the world so they are going to  have lower funding cost than the rest of the world.  This is something that various people over the course of history have called the exorbitant  privilege of being at the center of the international monetary system if you want.  And this exorbitant privilege is actually quite sizable in work I've done with the land  in the past we find that for the U.S. it's of the order of maybe two three percent excess  return per year on the external portfolio.  But there is a flip side to this and I want to focus on the flip side today.  So the flip side is there must be also in exchange for providing safe assets to the rest  of the world those countries must have a more exposed external balance sheet.  It's almost the flip side it's a flip side of the coin.  It comes with the territory if you want.  And that's what we've called exorbitant duty.  In other words you must be more exposed and you must be willing to absorb losses in times  of global financial instability.  Now how risky is your external balance sheet well in the U.S. we've estimated that the  losses since 2007 between 2007 and 2015 cumulative losses have been of the order of 23 percent  of U.S. GDP about for a little bit more than four trillion dollars.  The potentially larger the data is not perfect but those losses are potentially larger if  you look at a country like Switzerland.  And I'll come back to the case of Switzerland in a minute.  So if you're a provider of the safe assets you're going to have a huge demand from the  rest of the world and then you're going to end up with a very exposed external balance  sheet.  That's going to be an unpleasant situation.  It could actually even lead to a situation where it threatens maybe your fiscal capacity.  And that's in the sense what Griffin was talking about when he was talking about the  Griffin dilemma in the 1960s.  So this is sort of a modern version of this.  Now what can you do.  Well one of the things you can do is you can let your currency appreciate today so as to  limit your exposure exposed.  So there is a trade off here that countries are facing between an appreciation of their  currency today which is unpleasant as well because it means that your tradeable sector  is going to be less competitive.  You're going to suffer in terms of the competitiveness of your industries or suffer the potential  for larger losses in the future.  And this trade off is going to be worse.  Both terms of this trade off are going to be worse.  The smaller the country is.  And so that's why I wanted to come back to this issue of the regional safe asset providers  which is particularly relevant in the case of Europe.  So let me illustrate with a graph here that is borrowed from some theoretical work that  Elan and I did together in a separate paper.  What I show you here on the horizontal axis is the appreciation of your currency.  And on the vertical axis is the net exposure that you have on your external balance sheet.  And this blue line here is the trade off that you're facing.  You could have more exposure if you decide to keep your currency unchanged.  The more you appreciate your currency the lower is the exposure you have.  And this trade off here is worse if you're a small country.  That's for the small safe asset provider, the line that is out there.  And the line that's closer to the origin would be for a larger safe asset provider.  You don't take as much exposure relative to your own economic size or you don't need  as much of an appreciation.  An interesting thing is I think that if we think that countries dislike having too much  appreciation or dislike having too much exposure, they will try to choose a locus that is at  the tangency point between the trade off and their own preferences.  And for a large country you can see that this trade off may lead them to take quite a bit  of exposure and they don't need to have as much appreciation.  For smaller countries our conclusion would be that they will have to rely on letting  their currency appreciate more.  If they don't then instead if they fixed their currency for instance they would be at a point  like point C here with an enormous amount of exposure.  And that's how we analyze the situation that Switzerland has faced between 2011 and 2015.  From 2011, September 2011 the Swiss National Bank announces that it wants to peg, it puts  a floor which amounts to almost the same thing on the value of the Swiss franc corrective  to the euro.  Effectively it's saying we're not going to let this appreciation process play so we're  going to take the exposure both the Swiss National Bank but also the country as a whole.  And that meant very elevated levels of exposure which eventually the Swiss themselves felt  very uncomfortable with and therefore decided in January 2015 to let the currency appreciate  moving from point C to point B. So that's our interpretation of that particular episode.  But now what I want to do is I want to focus on another case which is what we call core  EMU.  So if we think about the safe asset providers inside the eurozone.  So that's Germany of course but that's not just Germany, that's also France and the Netherlands  and Belgium.  And here we know the story about what happened since the onset of the common currency which  is that these countries became safe asset providers but with an extra twist.  So they didn't just provide insurance to other countries inside the eurozone but they also  intermediated foreign capital coming from the rest of the world towards the periphery.  So French and German banks would actually be able to borrow internationally and then  channel these funds to the periphery countries.  That's something that's been shown very convincingly in some work that Moriape's felt is done with  getting a hell.  Now the eurozone inside the eurozone there is a common currency so you can't let the  currency appreciate.  You are in fact in terms of the previous graph you're stuck at point C there.  So you have to sort of have this elevated level of exposure.  Unlike the case of the US most of that exposure wasn't a form of cross border loans and debt  not equity or direct investment and that's going to play a role in the second part of  the story.  Because once the crisis happens when the crisis hit then instead of having a market repricing  of these instruments, equities going down and the market value of corporations doing  direct investment being repriced what we had is that the losses were not realized.  Instead we had a very protracted resolution process where the losses pushed first onto  public sector balance sheet and then also pushed back onto the periphery balance sheet.  And the consequence of that was that it triggered multiple rounds of deleveraging policies in  the periphery itself that is what is behind this big push towards surplus in the current  account of the eurozone.  And so in effect the eurozone as a whole became a net demander of safe asset pushing its recession  to some extent onto the global economy.  Now we do a simple calculation which is very back of the envelope so we have to take it  with a grain of salt.  We ask suppose Kory MU would have the same balance sheet structure as the US with market  instruments but given its bigger size since there is no possibility for an appreciation  of the currency what would have been the losses incurred in the event of the crisis and we  find a staggering number.  We find 40% of Kory MU GDP.  Now this is not a normative number.  We're not saying this is the size of the losses that should be reabsorbed onto Kory MU balance  sheet but we're saying this is an indicator of the kind of exposure that comes with being  the safe asset supplier inside the eurozone and of course that's going to create a lot  of problems when you have to resolve losses that could be very significant.  So the conclusion from this is that the curse of the regional safe asset provider which has  just described this unpleasant tradeoff between appreciation or exposure has been at play  in the MU as well but it has also been a curse for the rest of the eurozone and perhaps even  for the global economy.  Now I've already mentioned this, policy implications and I conclude with that.  There are three things we think can be relevant in the current context especially if we think  about this more narrow focus on the Kory MU safe asset provision.  First it's going to be important to delink safe asset supply from a single country or  small group of countries.  And so here there are various proposals and we are not, this is not a purpose of this  paper to discuss them in detail but all of them have a common good feature which is that  they allow some form of pooling across, of resources not necessarily of losses across  a broader base.  Second point is an orderly and speedy loss taking mechanism is also going to be important  if we want to avoid this protracted rounds of delivering.  And third moving towards more market based instrument and here something like the capital  markets union can play an important role is also something that would be beneficial.  Thank you very much.  It's a great pleasure to be here, give thanks to the European Central Bank for asking me  and also to Elaine and Pierre Olivier for this very stimulating paper.  This comes as a sequel to a continuing flow of empirical wake up calls which Elaine has  delivered to all of us in thinking about international macroeconomics.  The conventional wisdom has been that the impossible trinity enables countries if they  have floating exchange rates to operate an independent monetary policy and defend themselves  from international risks.  Elaine's argument pursued over the last few years has been that the global credit cycle  makes that impossible.  That countries experience excess credit growth or alternatively monetary conditions which  are too tight imposed on them by the rest of the world in validating the trellema and  making independent monetary policies with floating exchange rates not feasible.  This has the implication of changing the way that we think about international macroeconomic  policies and it needs those of us who think about international models it leads us to  think about replacing uncovered interest parity with the much more careful modern portfolio  theory of asset allocation by investors in the face of differing risks across countries.  This has policy implications of two kinds for capital controls in emerging market economies  and for international cooperation in the setting of macroeconomic policies in advanced countries  of the kind that Mario Draghi was talking about earlier this morning.  I expect today more of the same and a discussion of those issues.  Instead, we got something which builds upon this in a very different way but in a way  which turns out to be closely related.  The first thought of the paper is to add empirical support to the well understood ideas about  why long term real interest rates are likely to continue to be low.  The very careful analysis of consumption being low relative to wealth is something which  is very useful in thinking about this tendency.  We can think about the reasons that underlie these pressures coming from the deleveraging  in the financial system and also from lack of confidence by consumers and investors as  well as for the reasons that was discussed by Pierre Olivier in his presentation.  The reasons which these are shared across countries we can think of in straightforward  Mondeau Fleming ways, low demand being transferred in that way that we think about in a world  with uncovered interest parity.  We can also, and I think it's useful to think about these forces as being shared between  countries in a way related to Elaine's earlier work about the international transfer of risks  through the global credit cycle.  This has very important implications for global macroeconomic policy which Pierre Olivier  talked about briefly and which Maria Draghi talked about at a great length in his earlier  talk.  The first of these implications is that the zero bound, the tendency towards exchange  rate warfare as a way of thinking about macroeconomic policy and attempting to push macroeconomic  policy forward for individual countries is a very real one.  How to think about the macroeconomic policy circumstance in this situation was very clearly  identified by Maria Draghi as going right back to the Mead, Timbergen set of ideas on targets  and instruments.  In the immediate period post the global financial crisis in 2009 there was an understanding  that there was a need for a shared expansion and this was first monetary and when the zero  bound was reached fiscal so that the use of fiscal policy was pursuing the problem of low  global demand.  But in 2010 at the G20 meeting in Toronto it was decided that public debt became a target  of policy and we reached what Mead, Timbergen would have called a world with a shortage of  instruments for targets and since then the use of fiscal policy in the pursuit of the  public debt target has meant that an addition to the problem of low global demand in circumstances  where monetary policy is not able to act and has pursued, has forced countries to pursue  QE and the related depreciation of exchange rates as a way of attempting to push their  economies in the direction required and made more difficult by fiscal policy not helping.  I've talked about these things in a paper which I reference at the bottom of this page  in a book which has just come out from Brookings.  The third part of the paper goes on to talk about exorbitant privilege and duty in a world  of this kind that faces regional providers of safe assets.  Such providers undertake the important point being made, they are undertaking risk transformation.  The example that we all understand which Elaine worked on many years ago is we now think of  as Chinese depositors holding US treasuries, low yield, low risk and US authorities and  residents holding foreign assets higher yield, higher risk.  They call this I think rightly a triffin problem but it's interesting to think about the way  in which this is a different triffin problem from the earlier one.  That was often thought about as a currency problem but I think of it really as a problem  arising out of economic policy making in that world of the Bretton Woods system in which  Germany and Japan were unprepared to devalue, to appreciate their exchange rates and the  US couldn't devalue.  The countries in Europe and elsewhere faced surpluses and they were also forced to accept  an unwanted US currency as the concomitant of these surpluses.  But this was a policy problem, a macro policy making that led to this triffin problem about  holding excess, holdings of dollars.  Here we have instead a 21st century triffin problem which is about the capital account  and emerges from this transformation of risk that we've had described for us.  Here we've seen in the last few days after the Brexit shock this at work with the exchange  rate for Japan appreciating a triffin problem facing them in the conduct of their policies.  But as Pierre Olivier has said to us very clearly it also applies to Germany.  The deposit is from abroad in Germany accepting safe assets in Germany and connected to the  target to balance this problem augmenting this.  And that last thing about Chinese is a holdover from an early bit of the slide, not relevant  here, it's equivalent to that.  And the German asset holders holding risky assets elsewhere.  But the paper and I myself also argue that spreading this privilege and duty to the rest  of the Eurozone has very significant consequences for the GYPS countries.  Bringing them towards a Eurozone appreciated exchange rate, leading as the concomitant  part of the very large euro surpluses, appreciated exchange rate and shortage of demand in Europe  caused by the policies adopted.  This is not helpful for the GYPS countries in attempting to pursue full employment as  well as the external position.  And this is also imposed bearing the burdens of the risk which the system has put in place  when the collapse came in 2010.  Currency devaluation was not possible and the burden imposed by this risk became both  a private sector and a sovereign debt burden in the south.  And this description of the macro workings of the Eurozone creates an important additional  argument to the ones which are in common play about the need for the writing down of sovereign  debt in some of the southern European countries.  The whole of this analysis I think is very helpful in thinking about the last few days.  And it's important to say that I stand here embarrassed in coming from the country that  has imposed this shock on the world in the last few days.  And like all of us in this room, very concerned to see if we can find a way forward in dealing  with this very large shock.  The shock creates additional problems for global macroeconomic policy at the world level  and I talked about the difficulties of those, that global macroeconomic policy in a world  in which there has been very significant fiscal consolidation.  This adds to the need for thinking about cooperative fiscal anti-osterity policy now.  And I'd pick up the point that Mario Draghi made about the G20.  I was involved in the 2014 discussions in Australia that led to the two in five objective  in Australia of raising global GDP by means of a mixture of infrastructure investment  and microeconomic reforms that would demand promoting.  That objective has been somewhat dropped.  It's the right way to describe what's happened subsequent to the Australian presence of the  G20.  I think it's important that it's picked up again by China this year.  The G20 is a forum in which the kind of cooperation between fiscal and monetary policy which Mario  Draghi talked about is possible to both discuss and achieve.  But also the second and the last part of the paper talks about the difficulties with the  Brexit shock as imposed on the world and in particular the Eurozone for Germany but also  in the south.  And the very significant move in asset returns in Italy in the last few days as a response  to this shock throws into even larger relief the difficulties of need for debt write down  in parts of the Eurozone which I think this whole framework has made important to the  whole policy process has made it important to consider and the framework which Ray and  Grinch has shown us provides a way of thinking about.  Right back to the beginning why did we get here.  This problem would have been much easier to deal with and much less likely to occur if  the policies of austerity which have been adopted had been tempered and put into a framework  of looser fiscal position until the recovery globally and with Europe was in a secure position.  I myself think that there was a contradiction within Britain between the fiscal austerity  and the ambition to win the referendum which crashed so badly last Thursday in my country.  I think there is also within Europe a contradiction between the fiscal policies which are being  adopted in the north of Europe and the kinds of issues which have been presented in the  Grinch and Ray paper to us today.  These issues throw into sharp relief the need to think more carefully about fiscal and monetary  cooperation within Europe as well as in the rest of the world.  Thanks very much.  Thank you very much David.  So we have 25 minutes or so for discussion I will first give the floor back to the speakers  to give them a chance to comment on the comments or to answer the comments.  But before that I would like to add two remarks of my own so I know I'm abusing my position  but I guess I have one shot and that will be it.  The first remark and the two remarks are related and both remarks are about safe assets.  The first remark was made by Guillermo already that my I mean there are lots of fantastically  thought provoking ideas in both papers but my frustration would be that you're not spending  that much time discussing what's a safe asset and the safeness of assets of safe assets.  Elaine once had a paper on the monies of money and we could have a discussion on the safeness  of safety.  And in particular what which kind of policy framework can contribute to the safeness of  assets and that's about ex ante incentives and that's about the fiscal framework in Europe  for instance.  So just to illustrate I see a contradiction between what David just said which is there  was within too much austerity and what you've said which is there is a shortage of safe assets.  If we want to see safe assets we need some fiscal frameworks.  So the first remark second remark which is related.  I see a tension in the policy recipe or the policy toolbox which which Barry put forward  which is saying at the same time we want to see cross border capital flows being more  based on equity and less on debt which I fully agree and that the whole point of our so-called  capital market union in Europe for instance that we would like in tri-euros on capital  flows to be more based on equity and less on debt or bank loans and I agree with that.  And then again the shortage of safe assets and that's again between the tension between  ex post incentives and ex ante incentives in a sense.  Ex ante you would like more of the internationally used assets to be less absorbing to set incentives  right and that's about equity flows that also the bank bail in that we have in Europe.  So we want bank bonds to absorb losses and that's good in terms of ex ante incentives  and then expose your regret to regret that safe assets are not there anymore.  So how do you square this.  So these were my two questions.  As you wish.  Yeah.  Barry do you want to start.  I think our chairmen's two questions really do cut to the core of the discussion.  I think it's right that moving toward more equity like claims does introduce an element  of ex ante risk that will have a depressing impact other things equal on the on cross  border capital flows on the collateral function of so-called safe and liquid assets.  There is a trade off there and international capital flows may be a casualty in part and  that may be a price that that in our wisdom we should we should accept.  The other point it has come up in in every single intervention this morning is the idea  that safety or liquidity is a difficult slippery concept and indeed indeed it is.  I prefer the older language about emphasizing liquidity the ability to buy and sell large  quantities of an asset without moving prices significantly against yourself.  But I think that's what other people have in mind as well when when they invoke the  modern term safety safety and liquidity have come in for lots of discussion in the in the  national and the domestic context post financial crisis.  They're now coming in for the the same discussion in the international context.  I think that analytical issues are equally slippery.  I think some of the problems and dangers of self fulfilling liquidity crises that we have  focused on in the domestic context post financial crisis arise in the international context  as well.  They point out the the need for a liquidity provider of last resort which is even more  problematic in the international context than it is domestically internationally we continue  to rely as an international liquidity provider of last resort to a remarkable extent on the  Fed which means that liquidity provision in last resort is available to some economies  primarily advanced and not emerging a long standing problem that we've only begun to  address.  Yes so very briefly because I think Barry addressed a number of points that would have  addressed exactly in the same way but safety is something that we recognize when we see  it and that is when you don't see it anymore when you don't want it disappears you knew  it was there and it's not there anymore.  More substantially it safety means different things to different economic agents or different  market participants.  Some for some people it's about nominalism is sufficient others care about currency others  care about collateral the market environment is important and in a sense this is something  I want to touch upon the notion of safe assets and especially when we think about different  assets issued in different jurisdictions with different in different currencies the currency  movements becomes part of this and asset could be safe locally but if it has a negative beta  globally then it may be not safe for the rest of the world it may still be held locally.  So there are different components of this demand and I think that's an important part  of the discussion.  You asked about shortage of safe assets versus austerity how can we have safe assets if we  don't have a good fiscal stance.  Yes this is true and in a sense we could see that the efforts of rebuilding public sector  balance sheet is to prepare us well for the next crisis but we first have to get out of  the current one and in the current one we have to be concerned about self-defeating efforts  in terms of aggregate activity.  The separation between contingent payoffs versus non contingent payoffs safe requires some form  of non contingency but here I think an important distinction is between private and public assets.  I think when we're talking about introducing contingencies we're mostly talking about having  it on the private sector side and that's an important thing.  I think the capacity of the private sector to issue safe assets is very very limited  for reasons that are discussed in literature and have to do with the fact that they don't  have a direct backstop that's tied to fiscal resources or as Gujama would emphasize to  the common contract we have on ourselves.
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