Recent econometric estimates suggest that currency unions have far greater effects on trade patterns than previously believed. Since currency unions are good for trade, and trade is good for growth, that is one major argument in favor of EMU. If there were evidence that the boost to trade within EMU was likely to come in part at the expense of trade with outsiders, that would imply something stronger, for a neighbor such as the United Kingdom: that life outside EMU would get progressively less attractive in the future. But there is no such evidence, either for currency unions in general (according to Frankel–Rose) or for the first three years of EMU in particular (according to Micco, Stein, and Ordoñez). Furthermore, there are the usual countervailing arguments for retaining monetary independence, particularly the famous asymmetric shocks. One possible argument for waiting is that UK trade with euroland is still increasing, probably due to lagged effects of joining the EU and the Single Market initiative. Estimates suggest that the growing trade links in turn lead to growing cyclical correlation. The implication is that the UK may better qualify for the optimum currency area criteria in the future than in the past. On the other hand, if, as a result of waiting to enter, London loses to Frankfurt its position as the leading financial center in the European time zone, that loss may not be readily recoverable in the future.
Download PDFTo quantify the implications of common currencies for trade and income, we use data for over 200 countries and dependencies. In our two–stage approach, estimates at the first stage suggest that belonging to a currency union/board triples trade with other currency union members. Moreover, there is no evidence of trade–diversion. Our estimates at the second stage suggest that every one percent increase in a country's overall trade (relative to GDP) raises income per capita by at least one third of a percent. We combine the two estimates to quantify the effect of common currencies on output. Our results support the hypothesis that important beneficial effects of currency unions come through the promotion of trade.
Download PDF[Third Annual IMF Research Conference, Washington, DC, November 7?8, 2002.]
What do we mean by institutions? The generality of the word cries out for a definition. I am not going to attempt it. A narrow interpretation would consist of only specific legal bodies or procedural mechanisms. Examples include regulatory agencies (e.g., Securities and Exchange Commissions), standards–setting bodies (e.g., for accounting), and what are sometimes called "commitment devices" (currency boards, guarantees of central bank independence, balanced budget amendments, the Stability and Growth Pact, etc.). A broad definition would include everything about a society that is more detailed than the basic theoretical model in a graduate economics textbook: from the existence of efficiency wages and a six–month gold futures market, to culture. The notion of institutional quality that has become common in the growth literature lies at an intermediate level of generality, and pertains to Property rights and Rule of Law. I am happy to accept that usage. But, before I turn to it, I want to flag the wide variety of issues that could be termed institutional, and to observe that they may not necessarily all be correlated. For example, democracy is on many people?s list. But the commitment devices I named (currency boards, independent CBs, Stability Pact), are distinctive for being institutions that prevent macroeconomic policy from being determined in "too democratic" a manner.
Download PDFThe debate over monetary standards and exchange rate regimes for developing countries is as wide open as ever. On the one hand, the big selling points of floating exchange rates—monetary independence and accommodation of terms of trade shocks—have not lived up to their promise. On the other hand, proposals for credible institutional monetary commitments to nominal anchors have each run aground on their own peculiar shoals. Rigid pegs to the dollar, for example, are dangerous when the dollar appreciates relative to other export markets.
This study explores a new proposal: that countries specialized in the export of a particular commodity should peg their currency to that commodity. When the dollar price of the commodity on world markets falls, the dollar exchange rate of the local currency would fall in tandem. The country would thus reap the best of both worlds: the advantage of a nominal anchor for monetary policy, together with the automatic accommodation to terms of trade shocks that floating rates claim to deliver. The paper conducts a set of counter-factual experiments. For each of a list of countries specialized in particular mineral or agricultural commodities, what would have happened, over the last 30 years, if it had pegged its currency to that commodity, as compared to pegging to the dollar, yen, or mark, or as compared to whatever exchange rate policy it actually followed historically? We compute under these scenarios the price of the commodity in local terms, and we then simulate the implications for exports. Illustrative of the results is that some victims of financial difficulties in the late 1990s might have achieved a stimulus to exports precisely when it was most needed, without having to go through wrenching currency collapses, if they had been on regimes of pegging to their export commodity: South Africa to gold or platinum, Nigeria and Indonesia to oil, Chile to copper, Argentina to wheat, Colombia to coffee, and so on.
Not all countries will benefit from a peg to their export commodity, and none will benefit in all time periods. Nonetheless, the results suggest that the proposal that some countries peg their currency to their principle export commodity deserves to take its place alongside pegs to major currencies and the other monetary regimes that countries consider.
601_frankelsaiki.pdfWCFIA Working Paper 02-07, September 2002.
We contribute to the debate over globalization and the environment by asking: What is the effect of trade on a country?s environment, for a given level of GDP? We take specific account of the endogeneity of trade, using exogenous geographic determinants of trade as instrumental variables. We find that trade tends to reduce three measures of air pollution. Statistical significance is high for SO2 , moderate for NO2 , and lacking for particulate matter. While results for other environmental measures are not as encouraging, there is little evidence that trade has a detrimental effect on the environment.
672_istradegoodorbad.pdfWhen I first arrived at the White House in September 1996, I had no idea that one of the issues on which I would spend the most time during my period as a Member of President Clinton?s Council of Economic Advisers was global climate change. But Under Secretary of State Tim Wirth had the month before announced a major change in policy: that the United States would in multilateral negotiations now support "legally binding" quantitative targets for the emission of greenhouse gases. This left 15 months for the US Administration to decide what kind of specifics it wanted, at the Third Conference of Parties of the UN Framework Convention on Climate Change (UNFCCC), scheduled for November 1997 in Kyoto. Because other countries take their cue from the superpower (whether it is to support or oppose US positions), this countdown engendered a certain amount of suspense: What specifically would the U.S. propose at the Kyoto Conference, most notably regarding how the numerical targets should be determined? Outsiders demanded to know –with particular tenacity in the case of the U.S. Congress, who feared the worst. I was a member of a large inter–agency group that worked intensively on what was to become the Kyoto Protocol.
I never thought that the agreement had a large chance of being ratified by the U.S. Senate, or of coming into force in a serious way. There were too many unbridgeable political chasms, as I will explain. Furthermore I understand the reasons why almost all economists, at least in the United States, disapprove of the Kyoto Protocol. Nevertheless, I am prepared to defend the Clinton version of the treaty, and I believe it was a step in the right direction.
I will begin by noting that the weight of scientific opinion seems indeed to have concluded that the Earth is getting warmer, that increasing concentrations of carbon dioxide and other greenhouse gases are the major cause, and that anthropogenic emissions are in turn responsible. I am not a scientist. But the latest IPCC report concludes "The globally averaged surface temperature is projected to increase by 1.4 to 5.8 degrees Celsius" over the period 1990 to 2100, and "global mean sea level is projected to rise by 0.09 to 0.88 metres." The evidence has become clearer over the last ten or twenty years. President George Bush, the Second, made a big mistake when he initially allied himself with the minority of disbelievers. It was a political mistake if nothing else. Even granting that the incoming administration in 2001 did not want to pursue Kyoto, it was foolish and unnecessary for the White House to dismiss the climate change problem.
This paper will take as given that the problem of global climate change is genuine, and is sufficiently important to be worth addressing by steps that are more than cosmetic. Because the externality is purely global – a ton of carbon emitted into the air, no matter where in the world, has the same global warming potential – the approach must be multilateral. Individual countries will not get far on their own, due to the free rider problem. Specifically, multilateral negotiations have since the Rio Summit of 1992 proceeded under the UNFCCC.
The paper will summarize major decisions that the Clinton Administration had to make, and why it made them as it did. What were the quantitative limits on emissions to be? How would greenhouse gases other than carbon dioxide be treated? Would trading across time or across countries be permitted? And so on. In my time in the government, I was surprised to discover that policy makers often must make such technical–sounding decisions with relatively little help from the body of technical knowledge and opinion outside the government. It is not just that academic research is too abstract to be of much direct help with the minutia of specific policy decisions. The pronouncements of think tanks and op–ed writers also ignore practical complexities, because they seek to make big points for general audiences. We were largely on our own.
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