Remarks on the role of the exchange rate and structural policies in correcting current account imbalances

Mr. Rintaro Tamaki, Deputy Secretary-General, OECD

SEMINAR ON EXCHANGE RATES AND TRADE27-28 March 2012

1

Impact of exchange rates on trade

There is no consensus on:

• Methodology to measure exchange rate alignment

• Impact of exchange volatility on trade

• Magnitude of the impact of exchange rates on trade flows.

2

Impact of exchange rates on trade is unclear due to:

• Potentially high import content of exports in globally integrated economies

• Price elasticities of demand differ across products

• Different price transmission mechanisms according to product and market

• Hedging and other risk management practices differ by size of firm.

3

Global imbalances widened prior to the crisis (Sum of absolute current accounts in US$, as % of area-GDP)

Global current account imbalances

Euro area current account imbalances

Source: OECD Economic Outlook, November 20114

Reforms that are desirable on welfare, equity or efficiency grounds may also reduce global imbalances

• Developing social welfare systems in China and other Asian economies would reduce precautionary saving, so moderating current account imbalances in surplus countries.

• Removing competition-unfriendly product market regulation could encourage capital spending in countries like Japan and Germany.

• Financial market reforms may relax borrowing constraints in emerging economies and thus help to reduce the high saving rates.

• Removing policy distortions that encourage consumption such as tax deduction of interest payments on mortgages might increase household saving in some countries including the United States.

+ More ambitious fiscal consolidation would reduce imbalances because government indebtedness is typically higher in deficit countries.5

A scenario analysis shows that fiscal consolidation combined with structural reforms can substantially

reduce global imbalancesAbsolute sum of global current account balances as % of world GDP

Note: The size of imbalances is measured as the sum of the absolute current balance-to-GDP ratios, weighted by

2009 GDP (in current USD). The starting values are based on the current-account-to-GDP ratios in 2009 .

6

The effect of structural reforms and fiscal consolidation could markedly reduce external

imbalances in some euro area countriesFiscal

consolidationFiscal consolidation

and structural reforms

7

8

Export-led Recovery from 2002 to 2007 Change of consumption & export

80

100

120

140

160

180

200

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ00 01 02 03 04 05 06 07 08 09 10

ExportNominal（ ）

ConsumptionNominal（ ）

Source Cabinet Office（ ）

Start of expansion phase（ ：2002 1Q 100＝ ）

Export: (J an. 2002)× 1.72

Consumption: (J an. 2002)× 1.04

The longest expansion phase in the postwar period【 】 Recovery phase【 】

Global Financial Crisis

Exchange rate and Stock price (2011 ～ )

7500

8000

8500

9000

9500

10000

10500

11000

1 2 3 4 5 6 7 8 9 10 11 12 1 2 32011 2012

(Yen)

74

76

78

80

82

84

86

88(Yen)

(Source)Bloomberg

USD/ J PY(right scale)

Nikkei Stock Average(left scale)

9

Sensitivity of stock price to exchange rate (1-year beta)

- 1.5

- 1

- 0.5

0

0.5

1

1.5

2

2.5

2000

/10/

220

01/2

/220

01/6

/220

01/1

0/2

2002

/2/2

2002

/6/2

2002

/10/

220

03/2

/220

03/6

/220

03/1

0/2

2004

/2/2

2004

/6/2

2004

/10/

220

05/2

/220

05/6

/220

05/1

0/2

2006

/2/2

2006

/6/2

2006

/10/

220

07/2

/220

07/6

/220

07/1

0/2

2008

/2/2

2008

/6/2

2008

/10/

220

09/2

/220

09/6

/220

09/1

0/2

2010

/2/2

2010

/6/2

2010

/10/

220

11/2

/220

11/6

/220

11/1

0/2

2012

/2/2

NKY- USD/ J PYDAX- USD/ EUR

0.41

- 1.27

Appreciation of Yen/Euro correlated withLower stock prices

Appreciation of Yen/Euro correlated withHigher stock prices

10

The current account balance of Japan (% of GDP)

11

References

• OECD (2011), “The Impact of Structural Reforms on Current Account Imbalances”, OECD Economics Department Policy Notes, No. 3.

• Kerdrain, C., Koske, I. and I. Wanner (2010), “The Impact of Structural Policies on Saving, Investment and Current Accounts”, OECD Economics Department Working Papers, No. 815.

• Huchet-Bourdon, M. and J. Korinek (2011), “To What Extent Do Exchange Rates and their Volatility Affect Trade?”, OECD Trade Policy Working Papers, No. 119, OECD Publishing. http://dx.doi.org/10.1787/5kg3slm7b8hg-en

• Huchet-Bourdon, M. and J. Korinek (2012), “Trade Effects of Exchange Rates and their Volatility: Chile and New Zealand”, OECD Trade Policy Working Papers, No. 136, OECD Publishing. http://dx.doi.org/10.1787/5k9cvpldq533-en

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