World Economic Outlook, April 2005: Globalization and External Balances

World Economic Outlook April 2005: Globalization and External Imbalances

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At the same time, the ratio of U. One explanation for this stable ratio lies in positive valuation effects. Thus, valuation effects helped stabilize the ratio of U. Greater financial integration between the U. Over the last two decades, the volume of both gross foreign assets and gross foreign liabilities increased sharply in the U. By the end of , gross U.

At the same time, gross U. As a result, exchange rate changes generated larger valuation effects. The latest estimate provided by the Bureau of Economic Analysis indicates that in , , and , exchange rate changes generated positive valuation effects equivalent to 2. Cavallo and Tille analyzed the role of these valuation effects in shaping the process of rebalancing the U. Adapting the framework of Obstfeld and Rogoff, they considered a scenario in which positive valuation effects stemming from dollar depreciation keep the ratio of net foreign liabilities to GDP in the U.

International Financial Integration and the Current Account Balance

This scenario is broadly similar to the recent behavior of U. It is also consistent with the analysis of Gourinchas and Rey , who found that valuation effects generated by exchange rate changes are particularly helpful in explaining the behavior of the U.

Cavallo and Tille find that valuation effects can smooth both the process of current account rebalancing and the depreciation of the dollar over time, as suggested also by Helbling, Batini, and Cardarelli A depreciation of the U. Recently, liabilities issued by the U. These purchases expose foreign investors to negative valuation effects when the U. They calculated that, under their global rebalancing scenario, the implied depreciation of the U. Many fear that such a development could prompt a substantial depreciation of the U.

It is usually prepared twice a year, as documentation for meetings of the International Monetary and Financial Committee, and forms the main instrument of the IMF's global surveillance activities. The Best Books of Check out the top books of the year on our page Best Books of Product details Format Paperback pages Dimensions Looking for beautiful books? Visit our Beautiful Books page and find lovely books for kids, photography lovers and more. However, the "temporary" price-level shifts driven by globalization can last a long time, and the pace of the shifts can be variable.

It is the job of the Bank of Canada to conduct monetary policy in a manner that takes into account such persistent shocks and ensures that they do not affect inflation expectations.

So how have these different factors been affecting the conduct of monetary policy in Canada? Many of the factors just discussed featured prominently in the recent Tokyo meeting of the G-7 finance ministers and central bank governors.

Key topics included the slowdown in the U. In addition to outlining a series of measures to improve the functioning of financial markets, my colleagues and I agreed that each country should continue to take fiscal and monetary policy measures appropriate to their particular economic circumstances.

In that document, the Bank said that the economy has been operating above its production capacity, thanks to strong domestic demand. This demand has been supported by a rise in real incomes, stemming from the gains in Canada's terms of trade which, as I mentioned earlier, have been driven by globalization.

The evolution of our terms of trade will depend importantly on demand from major emerging markets. The impact from our terms of trade is one factor that could lead to stronger domestic demand growth than we had assumed. This is something that we at the Bank will continue to watch closely.

Another issue that will continue to be important for us is the evolution of the pass-through to prices of movements in the exchange rate. As I noted earlier, some retailers — notably of motor vehicles and books — have adjusted prices downwards in the face of greater competitive pressures stemming from the rise of the Canadian dollar. In the MPR Update , the Bank said that we expect this to be a one-off movement in prices, but there is a possibility that there could be greater and more persistent downward pressure on prices than we assumed.

The Bank also identified the downside risk that the tightening in credit conditions could be greater and more protracted than assumed. As well, there could be a more prolonged slowdown in the U. These two risks are, of course, related. In line with our base-case projection and the associated risks, the Bank lowered the target for the overnight rate by one-quarter of one percentage point on 22 January. This followed a similar reduction on 4 December, and brought the Bank's key policy rate to 4 per cent.

In making the announcement in January, the Bank said that further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to return inflation to target over the medium term.

A panel data analysis of the growth effects of remittances

As I said recently, the timing and degree of that stimulus will be determined at future fixed announcement dates, after we have conducted a thorough analysis of, and applied our judgment to, all information available to us at that time. Let me conclude with some brief thoughts about how policy-makers in general should approach the issue of globalization.

There are tremendous benefits from embracing this integration of markets, but there are adjustment costs as well, in the form of exposing our economies to global competition and swings in relative prices. The challenge for policy-makers is to ensure that the benefits of globalization are maximized and widely shared.

In general, this means making sure that policies do not frustrate market-based adjustments, but rather are aimed at promoting flexibility in markets — particularly labour markets. This means maximizing the ability of workers to relocate if they wish, maintaining appropriate social safety nets that do not discourage employment, and focusing on lifelong learning and training. Beyond labour markets, governments should focus on domestic integration. Internationally, governments should also concentrate on removing barriers to trade and investment to maximize the benefits of globalization.

These imperatives will be tested during the current economic slowdown.

Corporate Governance

From the Bank of Canada's perspective, our challenge is to understand the various ways in which globalization affects both financial stability a topic for another speech and inflation. At the Bank, we will continue to share our perspectives on globalization and other broader trends so that individual Canadians, companies, and governments have the necessary context when making their savings and investment decisions. Finally, in light of the growing importance of global forces and the risk of negative spillovers from the policies of some emerging markets, we will continue to use our participation in international fora to shape global institutions and national policies so that globalization can fulfill its promised benefits for all.

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World Economic Outlook, April : Globalization and External Balances:

Monetary Policy Report — October The Bank projects that the Canadian economy will continue to grow in line with its potential through Digital Currencies and Fintech Understanding digital currencies and related financial technologies is an important part of our research agenda. Browse Press Browse and filter Bank of Canada press content by topic, author, location and content type.

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Maddison, "World Development and Outlook — Evidence Submitted to the House of Lords" 20 February Each country's labour force is weighted by its export-to-GDP ratio. Warwick, "Governments, Exports and Growth: See Bank for International Settlements, "Foreign exchange market intervention in emerging market economies: Santor, "Total and Core Inflation: Leung, "Markups in Canada: Have They Changed and Why?

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