CPBS Annual Report CPBS FRBSF Center for Pacific Basin Studies

CPBS 2007 Annual Report CPBS FRBSF Center for Pacific Basin Studies Center for Pacific Basin Studies 2007 Annual Report Contents From the Director .................................................... 2 Economic Conditions in Singapore and Vietnam: A Monetary Policymaker’s Report .......................................................................3 FRBSF President and CEO Janet L. Yellen 2007 Annual Pacific Basin Conference: Summary .................................................................. 7 Reuven Glick Sovereign Wealth Funds: Stumbling Blocks or Stepping Stones to Financial Globalization? ........................................................ 11 Joshua Aizenman and Reuven Glick Financial Globalization and Monetary Policy ..15 Mark Spiegel The U.S. Productivity Acceleration and the Current Account Deficit ................................. 19 Diego Valderrama The Asian Financial Crisis Ten Years Later: Assessing the Past and Looking to the Future ...........................................................23 FRBSF President and CEO Janet L. Yellen Other Center Programs ....................................... 31 Center Staff ............................................................ 32 Visiting Scholars ...................................................33 Center Working Papers ....................................... 34 Center Staff Pacific Basin Publications...............37 CPBS Pacific Basin Notes ....................................38 Other Recent Articles and Working Papers ....... 39 Participation in the Center’s Programs.............. 42 About the Center Since 1974 the Pacific Basin program of the Federal Reserve Bank of San Francisco has promoted cooperation among central banks in the Pacific Basin and enhanced public understanding of economic policy issues in the region. In 1990 the Center for Pacific Basin Studies was established by the Bank within its Economic Research Department to open the program to greater participation by researchers in other central banks, universities, research institutes, and international organizations. The Center’s mission is to further international understanding of major Pacific Basin monetary and economic policy issues. The Center’s programs are designed to carry out this mission through staff research, its visiting scholar program, its international network of research associates, and international conferences. 1 Center for Pacific Basin Studies 2007 Annual Report From the Director from the Center as well as from the Bank’s Division of Bank Supervision and Regulation. These trips advance the Bank’s broad objectives of serving as a repository of expertise on economic, banking, and financial issues relating to the Pacific Basin and of building ties with policymakers and economic officials there. The knowledge gained and the contacts developed are critical in understanding trends affecting the Twelfth District, in carrying out responsibilities in banking supervision, and in ensuring that policymakers have the understanding of global economic developments necessary to conduct policy and promote the stability of financial markets. President Yellen’s report on her trip is included in this publication. Center staff had a very productive year in promoting basic research on Asia-related economic issues. Our research environment is enhanced by our active visiting scholar program, which brings in academics to conduct research on Asia-related research. Our Asian visiting scholar program is specifically designed to bring senior researchers in from Asia. This year, we were honored to have Professor Charles Horioka, of Osaka University, who conducted research on household savings in China. The Center disseminates its research through various channels. Pacific Basin research results are initially issued in the FRBSF Working Paper series, with the intention of eventual publication in academic journals or the FRBSF Economic Review. Shorter analyses are distributed as “Pacific Basin Notes” through the FRBSF Economic Letter series. The Center’s publications can be accessed through its website at www.frbsf.org/ economics/pbc/. I would like to thank all those who have contributed to the success of the Center’s activities during the past year, particularly my colleague, Reuven Glick, who co-organized the Annual Conference with me, and colleagues who partnered with the Center to organize our joint activities. I would also like to thank Sylvia Papa for her continued excellent administrative assistance on behalf of the Center. Mark M. Spiegel Vice President, International Research, and Director, Center for Pacific Basin Studies The FRBSF Center for Pacific Basin Studies had a very active year in 2007. In addition to our annual research conference, we helped to organize the first annual conference of the Berkeley-National University of Singapore Risk Management Institute, together with that organization and the Monetary Authority of Singapore. In addition, we again co-sponsored our Joint Senior Policymaker Seminar with the World Bank, the Bank of France, and the Bank of England. These jointly sponsored events are valuable opportunities for furthering research on economic issues in Asia and conducting outreach to the global policy community. Our annual conference brought together scholars and policymakers to present and discuss research on a range of issues, including international pricing behavior and exchange rates, foreign reserve management, the efficacy of capital controls, Asian financial market integration, and developments in China. Our keynote address was given by Nicholas Lardy of the Petersen Institute for International Economics, who spoke on the issue of Chinese economic development, arguing that achieving a sustainable growth pattern in China would require more aggressive measures to reduce the country’s high savings rate. Each year, Center staff supports the President of the San Francisco Fed and the Federal Reserve Board Governor responsible for liaison with Asia in preparation for their “fact-finding” trips to the region. This year, Governor Kevin M. Warsh and President Yellen visited Vietnam and Singapore, accompanied by staff 2 Center for Pacific Basin Studies 2007 Annual Report Economic Conditions in Singapore and Vietnam: A Monetary Policymaker’s Report Corporation and Temasek, which jointly hold well over $200 billion in assets. Although conditions cooled in the fourth quarter, Singapore’s economy experienced robust growth in 2007. It is anticipated that GDP growth for the year was Janet Yellen President and Chief Executive Officer Each year, the President of the San Francisco Fed joins the Federal Reserve Board Governor responsible for liaison with Asia on a “fact-finding” trip to the region. These trips advance the Bank’s broad objectives of serving as a repository of expertise on economic, banking, and financial issues relating to the Pacific Basin and of building ties with policymakers and economic officials there. The knowledge gained and the contacts developed are valuable in understanding trends affecting the Twelfth District, in carrying out responsibilities in banking supervision, and in ensuring that policymakers have the understanding of global economic developments necessary to conduct policy and promote the stability of financial markets. This article summarizes President Yellen’s report to the Head Office Board of Directors on her trip to Singapore and Vietnam in November 2007. (For a discussion of findings from the trip regarding the banking and financial sectors, please see the February 2008 issue of the Bank’s publication, Asia Focus, http://www.frbsf.org/publications/banking/ asiafocus/2008/Asia_Focus_Feb_08.pdf) in the 7.5% to 8.0% range. Historically, Singapore has focused heavily on electronics. But, because of grow- ing competition, the government has implemented industrial policies to diversify the economy, including a focus on tourism and on building a world-class edu- cational system. Singapore also has made important and biotech research, bidding aggressively to attract renowned foreign scientists; indeed, a local company, ES Cell International, recently became the first firm to offer vials of stem cells over the Internet. Finally, it has promoted itself as a center for private banking. gains in the health sector, especially pharmaceuticals focused on financial services, and, in particular, it has With Singapore’s robust growth in 2007, unem- ployment has fallen to a nine-year low of 1.3% and past year. Our discussions at the Monetary Authority inflation has risen, reaching close to 4% during the of Singapore (MAS) focused in part on its approach to macroeconomic management. MAS implements policy largely via exchange rate adjustments, and it has been addressing rising inflationary pressures by allowing the currency to appreciate more rapidly against the U.S. dollar. This appreciation directly lowers import price inflation and curbs growth in net exports. The MAS anticipates that growth in 2008 will also be somewhat depressed due to spillovers from the U.S. consumption and imports from the region. Singapore the city-state of Singapore and the country of Vietnam. We began in Singapore because it serves as a major financial hub in Southeast Asia and is a logical destination for garnering information about the region as a whole. We also wanted to learn more about the investment strategies of sovereign wealth funds, and Singapore has two major ones: the Government Investment In 2007, we visited two Southeast Asian economies, U.S. subprime problem, which is expected to dampen Decoupling? This brings me to one of the most im- 3 Center for Pacific Basin Studies 2007 Annual Report portant topics of conversation on our trip, namely, how developments in the United States are likely to affect Singapore, Vietnam, and other Asian economies. As much as we tried to keep our discussions focused on Asia, our contacts wanted to talk about U.S. developments. Once upon a time it was said that when ing greatly exceeds the domestic demand for funds to finance capital formation, and the gap has been rising over time. These huge current account surpluses have allowed Singapore to accumulate a large stock of foreign assets, controlled by the government in several $75 billion in 2001 to $136 billion in 2006. forms. Reserves held at the MAS have grown from Singapore’s sovereign wealth funds. The Singapore the U.S. sneezes, the global economy catches cold. But recently, some observers have argued that the Asian and U.S. economies have become “decoupled”—that a downturn in the United States will produce very consensus among the market participants we met is that the decoupling view is not correct—that the U.S. and Asian economies are strongly enough linked that true for Singapore, which has a very open economy. government also has two large investment funds, ofthe government’s assets: Temasek and the Government Investment Corporation (GIC). SWFs have recently become very large, very vis- few spillovers for the Asian economies. The general ten called sovereign wealth funds (SWFs), to manage there will be significant spillovers. This is particularly But even though such negative spillovers seem likely high level, officials in both countries still anticipate flects China’s growing role as a generator of demand for the region’s products as well as the benefits that Asian economies are realizing from market interest Europe and Japan) worldwide. rate reductions (or delayed increases, in the case of Singapore continues to run a trade surplus. An indi- ible, and very controversial. The controversy arises because most are not terribly transparent about either the size of their holdings or their investment stratemay be dictated not just by profit-maximizing intenAsia’s SWFs, see Aizenman and Glick 2007.) In Singa- to dampen growth somewhat from an exceptionally that growth will remain solid. The optimism partly re- gies and because of concerns that their investments tions, but also by geopolitical strategies. (For more on pore, we visited with senior officials of the GIC and Temasek. These firms have been in the headlines for their recent investments in Merrill Lynch and UBS. Both funds have faced increased international prestheir accountability to domestic shareholders, reduce dress the risk of growing financial protectionism. sure to become more transparent in order to improve risks to the international financial system, and adThe GIC was established in 1981 to manage Singa- cator of Singapore’s openness is that exports plus imports as a share of GDP—a common measure of excellent port facilities, and liberal re-exporting tax the region. So, almost half of Singapore’s exports are re-exports. openness—stands at almost 300%. Due to its location, policies, Singapore has long served as an entrepôt for pore’s foreign exchange reserves. It does not publish financial results but is believed to manage more than $100 billion in assets through a network of internaworld. Its portfolio includes equity, fixed income, foreign exchange, money markets, real estate, and private equity. The GIC also makes direct investments South Korea, Australia, and Southeast Asia. surplus—over 25% of GDP in 2007—which has been rising over time. A country’s current account surplus is equivalent to its flow of foreign lending. Like many other East Asian economies, Singapore suffers from a The country runs a very sizeable current account tional offices, making it one of the largest SWFs in the in Asian companies, focusing on China, Japan, India, so-called saving glut, in the sense that domestic sav- 4 Center for Pacific Basin Studies 2007 Annual Report state-owned enterprises (SOEs) as well as proceeds from the sale of shares of SOEs. Its portfolio reached $108 billion as of March 2007. Temasek has expanded aggressively and since 2002 has focused on direct investment opportunities in Asia, which now account for 40% of its portfolio. Temasek is funded from dividends from Singapore’s with the clear commitment by senior party leaders to Trade Organization (WTO) in January 2007 reinforces the irreversibility of these reforms. continued reform. Vietnam’s accession to the World eign investment, which has grown rapidly and is fuel- The country is viewed as highly hospitable to for- investments than the GIC. It doesn’t seek to manage companies, but it may exert influence on or sit on the boards of some institutions. Temasek has been more actively engaged in its ing a vibrant export sector. Since its accession to the WTO, Vietnam has been freed of quota restrictions on Vietnam has a large pool of unskilled workers currently earning very low wages. Half the population is below the age of 25, and 90% is literate. its textile exports, and these have grown very rapidly. Vietnam officials since the normalization of bilateral relations in 1995. My instant impression was one of a widespread tical ideas. The streets are crowded with motor scooters tivity, and urban centers that already mirror those in far entrepreneurial spirit and an openness to new and pracand economic activity, round-the-clock construction acmore developed economies. The sense of optimism and excitement is palpable. And the economy is booming: With growth close to 8% per year since 2001, it is conhas been accompanied by very significant reductions in poverty. sidered by many a new “Asian miracle.” This growth Our visit to Vietnam was the first by Federal Reserve growth has been increased inflationary pressure, which reached 10% this year. We discussed this situation with our counterparts at the State Bank of Vietnam (SBV). The problem the government faces is a classic one, where a monetary authority’s exchange rate goal is inconsistent with its desire for price stability. The SBV is One consequence of Vietnam’s strong economic not yet independent, and its policies reflect the high priority that the government attaches to very rapid ward pressure on its currency caused by its large trade equity market. export growth. The SBV is therefore resisting the upsurpluses and large capital inflows into its booming Vietnam’s equitization of SOEs. Like many formerly growth. They have aimed to transition Vietnam rapidly to a market-oriented economy. The private economy is flourishing, and formal official recognition of Vietnam’s private sector expanded with the passage in 2005 Government policies have been a huge impetus to nonmarket economies including China, Vietnam faces the issue of how to deal with its SOEs. We met with (SCIC) to discuss issues relating to privatization—or officials of the State Capital Investment Corporation equitization as it is called in Vietnam. Equitization has been proceeding rapidly, and the number of SOEs has fallen from about 12,000 to 2,500. The process involves converting an SOE to a joint stock company with some of a Unified Enterprise Law and a Common Investment Law. These laws are designed to boost private investdevelopment. They also aim to improve corporate govstate, private domestic, and foreign firms. ment by reducing administrative barriers to business ernance in SOEs and to create a level playing field for In Hanoi, we met with top governmental officials shares retained by the government, some allocated to employees on the basis of tenure with the company, exchanges. The state’s retained interest is determined and the remaining shares sold in the market on public by the strategic nature of the company and managed involved in economic policy. We were quite impressed 5 Center for Pacific Basin Studies 2007 Annual Report by the SCIC. The economic problems associated with privatizing SOEs—layoffs and unemployment—have been much less severe in Vietnam than in many other transition economies. Most of Vietnam’s privatized SOEs have been profitable and have expanded. The sheer number of equitizations has helped fuel of Ho Chi Minh City reminded us that the level of techrudimentary—”shovel level.” The fear is that if Vietsustained growth beyond the level of a newly emergparticipant we met suggested that Vietnam’s fate might point reduced cost advantages would halt its rapid no small achievement, as GDP per capita in Vietnam stood at less than a quarter of Thai levels in 2005. nology in much of the manufacturing sector is still quite nam is unable to upgrade its technology substantially, ing economy will be impossible. More than one market be to catch up to Thai levels of development, at which growth. Still, catching up to Thailand would represent the stock exchanges. We met with the president of the Ho Chi Minh City Stock Exchange and visited the trading floor. New IPOs, plus the rising values of shares of equitized firms, have contributed to a 30-fold increase in market capitalization. Market capitalization has reached 38% of GDP, and government officials expect this to double again in another year. According to the 2009. president, the exchange itself would be equitized in Challenges to growth. The dominant sense in Vietnam strong growth. One is an inadequate education system. There are also structural impediments to continued Although literacy is high, many market participants exshortage of skilled labor, particularly labor with management skills. Infrastructure is a further barrier to growth. is one of excitement about the economic progress that pressed concern about the quality of education and a has been made and enthusiasm about the economy’s challenges that remain and possible obstacles to continued success. One obstacle relates to technological progress. Some future. We sought, however, to catalog some of the nam made clear that the nation has already traveled far along the road of transition to an emerging market economy. These challenges notwithstanding, our visit to Viet- studies suggest that the booming growth experienced over the past decade has largely been driven by capital accumulation rather than improvements in technology. There are exceptions. In Hanoi, we met with Westerntrained venture capitalists who were nurturing indigthem for IPOs, in one case, with a planned NASDAQ Reference Aizenman, Joshua, and Reuven Glick. 2007. “Sovereign Wealth Funds: Stumbling Blocks or Stepping Stones to Financial Globalization?” FRBSF Economic Letter 2007-38 (December 14). http://www.frbsf.org/publications/economics/letter/2007/el2007-38.html enous startup technology companies and grooming listing. But an expedition to a factory on the outskirts 6 Center for Pacific Basin Studies 2007 Annual Report 2007 Annual Pacific Basin Conference: Summary though manufactured goods are heavily traded across countries, the prices that U.S. consumers pay for imports of manufactures move much less than one-forone with the prices that foreign producers charge in Reuven Glick Group Vice President International Research This article summarizes the papers presented at the 2007 their own markets. national trade to explain this behavior. In their model, The authors formulate a quantitative model of inter- producers engage in “pricing-to-market” behavior; that is, they raise the price at which they sell in foreign markets much less than any increase in their costs. The reason firms do not fully pass through changes in their marginal costs to their prices is because their desired markup depends on their share of the foreign Annual Pacific Basin conference held at the Federal Reserve Bank of San Francisco on June 8-9, 2007, under the sponsorship of the Bank’s Center for Pacific Basin Studies. The papers are listed at the end and are available at http://www.frbsf.org/economics/conferences/0706/agenda.pdf sales market. By lowering markups, firms can avoid losing too much market share as they adjust prices in response to greater costs. Corsetti, Dedola, and Leduc examine whether U.S. papers on a variety of international topics, including international pricing behavior and exchange rates, foreign reserve management, the efficacy of capital controls, China. This year’s Pacific Basin conference brought together economic growth causes the dollar to depreciate or appreciate. Several traditional international macro models predict that the domestic currency should Asian financial market integration, and developments in depreciate as a country grows. For example, models in which domestic demand is stimulated by monetary policy often predict higher inflation and depreciation of the currency. Other models in which productivity shocks expand domestic output also imply an International prices and exchange rates tional macroeconomics: why are changes in a country’s terms of trade—that is, the relative price of its exports in the relative prices of goods produced in the United Atkeson and Burstein address a puzzle in interna- increase in the supply of exportable goods, causing to its imports—generally much smaller than changes States and goods produced abroad? For example, beproduced abroad rose by roughly 40% relative to the the relative price of exports to decline in world mar- kets. This decline in the country’s terms of trade also depreciates the currency. However, these predictions are at odds with the recent experience of the U.S., in which the high productivity and domestic output nied by a strong real appreciation of the dollar. boom of the second half of the 1990s was accompaThe authors seek to reconcile the empirical evidence tween 1985 and 1988, the price of manufactured goods average price of manufactured goods produced in the U.S.; movements of similar magnitudes occurred again in the late 1990s and more recently after 2002. In conof U.S.-manufactured goods have been much less vola- trast, the terms of trade between exports and imports tile. This is consistent with the stylized fact that, even 7 with theory by investigating the role of U.S. productiv- ity in a real business cycle model. They find that U.S. productivity shocks do, indeed, increase investment Center for Pacific Basin Studies 2007 Annual Report eters of the model to accord with a typical developing economy, they conclude that the optimal policy is not to hold reserves at all; contingent borrowing provides ior, of course. The authors suggest explanations for sufficient insurance. This contrasts with actual behavthe contrast between this theoretical prediction and actual behavior: developing countries often face limmay be motivated to hold reserves, not just for insurance reasons, but also for political economy considerations, such as desired spending on public works. its to the extent of their foreign borrowing, and they Capital controls of ongoing debate. Magud, Reinhart, and Rogoff arAndrew Atkeson, UCLA, presenting his paper and output. At the same time, however, these shocks also generate strong domestic wealth effects that boost conditions) also leads to an appreciation of the dollar. demand for domestic goods as well that (under certain gue that it is hard to compare results from existing studies on capital controls, since there are significant differences across countries and time in the control measures implemented, there is no common empiriThe effectiveness of capital controls is the subject cal methodology, nor is there any clear definition of what constitutes “success.” The authors seek to fill this void and measure the effectiveness of controls on short-term capital flows by whether they reduce the volume of capital flows, decrease the proportion of short-term capital flows, reduce real exchange rate pressures, and/or allow for more monetary policy independence. They find that capital controls on inflows, reduce real exchange rate pressures, and make trols on outflows do not have any systematic effect, tal controls on outflows need not always be effective. flows seem to reduce the share of short-term capital monetary policy more independent, but capital conwith the exception of Malaysia. Hence imposing capiHenry surveys the literature on capital flows and Foreign reserves circles about whether some countries are now holding There is a renewed interest in policy and academic too much foreign reserves. International reserves hold- ings by developing countries, for example, have risen rapidly in recent years, amounting to 20% of GDP in common explanation advanced for foreign reserve acagainst the risk of shocks, such as sudden spikes in foreign interest rates or “stops” of capital inflows. Alfaro and Kanczuk argue that foreign borrowing 2005, quadruple the level in high-income countries. A cumulation is that it provides an insurance mechanism also provides some of the same functions as holding reserves. They study optimal reserve policy in a stochastic dynamic general equilibrium model that recborrowing abroad as needed. Calibrating the param- finds little evidence that capital account openness is associated with higher economic growth. However, he argues that traditional theory implies that capital account liberalization should have only a temporary, ognizes the potential benefits of holding reserves or not a permanent, effect on growth. He shows that 8 Center for Pacific Basin Studies 2007 Annual Report opening the capital account leads countries to tempo- ers taken up by banks from Asia. However, the role rarily invest more and grow faster than they did when their capital accounts were closed. Allowing foreign investors into emerging market equity markets lowers the cost of capital, raises the optimal level of the capital stock, and increases steady-state per capita income. During the transition to the new steady-state (higher) level of capital stock, growth rates will increase above normal before eventually returning to trend. of foreign investors in local currency bond markets is very limited, because of either explicit inflow restrictions or withholding tax requirements. McCauley argued that foreign investors in domestic bond markets could provide a more diverse investor base to support domestic growth (though at the risk of greater exposure of local markets to global bond market strains and possibly large inflows and outflows). Barry Eichengreen of the University of California Asian financial markets of integration of East Asian economies with world fibecome more integrated with world financial markets and investment still are much more highly correlated within East Asia compared to the euro area. They also within Asia than it is within the euro area. In addition, Fujiki and Terada-Hagiwara examine the degree at Berkeley also emphasized the importance of developing national bond markets in local currency. He noted that Asia has progressed slowly in developing local markets for corporate debt, particularly in terms of market liquidity. He provided evidence that bond nancial markets. They find that, while East Asia has since the Asia crisis of 1997-1998, domestic saving market growth in developing countries depends on the extent of banking sector development, macroeconomic stability, creditor rights, and corporate gov- find that the cross-holding of financial assets is lower they find no evidence of any decline in consumption ernance. He attributed the limited development of corporate bond markets in Asia to slow progress in several of these areas. volatility in Asia as one might expect if greater finanwith the rest of the world. These results suggest that cial integration were enabling greater risk-sharing there is room for welfare gains in Asia via further asas with the rest of the world. The results also imply set flows and risk-sharing within the region as well that increased integration into world financial markets union in East Asia at this stage. alone is unlikely to provide a firm basis for a currency Two panelists offered presentations on Asian capi- tal markets. Robert McCauley of the Bank for International Settlements observed that Asian financial markets have become more integrated with the rest of the world. Equity investors from the U.S. and Europe invest heavily in the region. In addition, dollar-denominated bonds and syndicated loan markets show sigsold by Asian issuers bought by Asian residents, and nificant regional integration, with 40% of dollar bonds similar fractions of syndicated loans for Asian borrow9 Charles Horioka, Osaka University, presenting his paper Center for Pacific Basin Studies 2007 Annual Report China saving far the highest in the world. China’s domestic investment rate has also been high, but not as high as saving, resulting in net current account surpluses which rose ing trade deficits with its trading partners, particularly China’s overall saving rate is now nearly 50%, by household saving rate (in part because the shortness of their sample limits the time series variation in demographic variables). Thus it is not clear how much saving will fall once the aging of the popuon the effects of China’s aging population, its onechild policy, and its currently high corporate saving levels. Nicholas Lardy of the Peterson Institute of lation is completed. Further research is warranted from 4% of GDP in 2004 to 7% in 2007. The correspondthe United States, imply that China’s high saving rate with other countries. has important ramifications for its economic relations Horioka and Wan analyze the determinants of the Economics delivered the keynote address and household saving rate in China using panel data on discussed China’s recent efforts to alter fundamentally the country’s growth strategy by expanding domestic consumption in place of investment and exports. In his view the success of this new policy requires policies to reduce China’s currently high Chinese provinces for the period 1995-2004. They find China’s saving rate is very persistent and strongly re- lated to income growth and the interest rate (in the case of rural, but not urban, households). However, they do not find that the variables relating to the age structure saving rate. He argued, however, that initiatives to implement these policies have thus far been modest in scope. of the population have any significant impact on the Conference papers Alfaro, Laura, and Fabio Kanczuk. “Optimal Reserve Management and Sovereign Debt.” Atkeson, Andrew, and Ariel Burstein. “Pricing-toMarket, Trade Costs, and International Relative Prices.” Corsetti, Giancarlo, Luca Dedola, and Sylvain Leduc. “Productivity and the Dollar.” Fujiki, Hiroshi, and Akiko Terada-Hagiwara. “Financial Integration in East Asia.” Henry, Peter Blair. “Capital Account Liberalization: Theory, Evidence, and Speculation.” Horioka, Charles Yuji, and Junmin Wan. “The Determinants of Household Saving in China: A Dynamic Panel Analysis of Provincial Data.” Lardy, Nicholas. “China: Rebalancing Economic Growth.” Nicholas Lardy, Peterson Institute for International Economics, presented a keynote address on the Chinese economy. 10 Magud, Nicolas, Carmen Reinhart, and Kenneth Rogoff. “Capital Controls: Myth and Reality, A Portfolio Balance Approach to Capital Controls.” Center for Pacific Basin Studies 2007 Annual Report Sovereign Wealth Funds: Stumbling Blocks or Stepping Stones to Financial Globalization? Reasons for the growth of SWFs consequence of countries running persistent current account surpluses and accumulating net foreign assets. SWFs arise as a by-product of these current account surpluses in circumstances where sovereign governments Joshua Aizenman Visiting Scholar, FRBSF and Professor, U.C. Santa Cruz Reuven Glick Group Vice President International Research The growth of SWFs may be viewed as an unintended retain control of the foreign assets. foreign assets by sovereigns and the resulting growth of sovereign wealth funds. First, the recent commodity price boom has swelled the sovereign asset holdings of commodity-exporting countries where the public There are several reasons for the accumulation of net trolled by sovereign governments that hold and manage wealth fund assets in the range of $1.5 to 2.5 trillion. This Sovereign wealth funds (SWFs) are saving funds con- foreign assets. Private analysts put current sovereign amount is projected to grow sevenfold to $15 trillion in the next ten years, an amount larger than the current global stock of foreign reserves of about $5 trillion (Jen ties and projected growth of SWFs have stirred debate sector controls commodity exports or heavily taxes the revenues earned by private commodity exporters. Earlier effect on competitiveness of domestic inflation and large commodity price booms vividly illustrate the adverse real appreciations induced by using these windfall gains 2007). While not a new phenomenon, the recent activiabout the extent to which their size may allow them to driven by political, rather than economic and financial, considerations. This article gives an overview of the debate about the for domestic expenditures, particularly when the gains are transitory. For example, the windfall gains associated with the sharp rise in the price of oil in 1973-1974 induced oil-exporting countries to increase government spendin the early 1980s. Consequently, some sovereigns have ing; this spending fell sharply when oil prices collapsed sought to deal with these concerns by saving a share of destabilize financial markets and their policies may be expanding role of SWFs in international financial markets. lenges they pose for financial globalization. While there invest in well-diversified equity indexes in individual the gains in SWFs. In some cases these savings are used and depress tax revenue. In other cases, SWFs serve We explain the forces leading to their growth and the chalis no quick fix to these challenges, encouraging SWFs to countries, such as the S&P 500 in the United States, may transform the role of these funds from stumbling blocks to stepping stones towards financial globalization. as a financial stabilizer if commodity prices decline as mechanisms to transform concentrated exposure of balanced and diversified global exposure, thereby protecting the income of future generations. A second factor behind the growth of SWFs is the ef- public assets to volatile commodity prices into a more fort by many emerging market countries to accumulate large stockpiles of international reserves by running persistent current account surpluses (see Aizenman 2007). Many of these countries now hold more reserves 11 Center for Pacific Basin Studies 2007 Annual Report than needed for prudential reasons. Attempts to diversify these reserves into potentially higher-yielding assets entail transferring them from the control of the central bank to the treasury or to quasi-public entities with the mandate to pursue financial strategies aiming at higher long-run returns. Current estimates suggest that funds derived from oil modities, real estate, derivatives, and foreign direct investment. They have access to and frequently make sultants. use of professional private fund managers and conSWFs differ in their strategies for investing abroad. Unfortunately, not much is known about the activities of individual sovereign funds, since very few publish information about their assets, liabilities, or investment strategies. and gas export revenues account for some two-thirds of funds mainly controlled by Asian surplus exporters (Jen the total assets held by SWFs, with the rest consisting of 2007). The four main Persian Gulf investment funds (Abu Dhabi Investment Authority, Kuwait Investment Authority, Qatar Investment Authority, and Dubai International most transparent large SWF, invests in a wide set of foreign industrial and emerging market securities, It generally has not sought out management control of shares in companies. with significant portions under external management. The Norwegian Government Pension Fund, the Capital), launched in the 1970s, now have a combined asset value of over $1 trillion. Norway’s Government Fund of Norway) was established in 1990 and now holds over $300 billion. Russia’s Oil Stability Fund, established Saudi Arabia’s oil surplus funds are managed by the central bank together with its reserves.) Pension Fund - Global (previously called the Petroleum its investments, tending to have only small ownership Singapore’s GIC was set up in 1981 to manage the in 2003, currently has over $100 billion in assets. (All of bulk of Singapore’s foreign exchange reserves and operates along lines similar to most private investment management companies, investing government including foreign equities, bonds, and property. The reserves across a range of asset classes and regions, International Monetary Fund has urged the GIC to be more transparent by publishing broad details of its accounts, a suggestion that Singapore has yet to accept. funds--the Government Investment Corporation (GIC) and Temasek--have combined assets of over $200 billion. Korea’s Korea Investment Corporation was launched in 2005 with $20 billion in assets. China recently set up the China Investment Corporation with assets worth $200 $1.2 trillion in foreign reserves. In Asia, Singapore’s two government investment billion to manage more aggressively a portion of its over investment arm, was established in 1974. It takes Temasek, the Singapore government’s strategic long-term stakes in local and foreign companies and tends to take a more activist approach to its investments. Temasek has released some information about its financial performance since 2004. But the available information has been confined to consolidated acinvestments and omits historical financial data before 2001.Other countries invest through intermediaries; stake in Blackstone Group, a U.S. private equity firm. counts that do not disclose flows between subsidiary Investment strategies reserves conservatively in safe and marketable instruments that are readily available to monetary authorities to diversify foreign exchange assets and earn a higher to meet balance of payments needs. SWFs typically seek return by investing in a broader range of asset classes, including longer-term government bonds, agency and asset-backed securities, corporate bonds, equities, comCentral banks generally invest their foreign exchange for example,China’s new SWF just bought a $3 billion 12 Center for Pacific Basin Studies 2007 Annual Report Implications and concerns to zero. Hence, the growing current account surpluses By definition, the sum of all current accounts adds up risking international trade in goods and services. Already, globalization, despite its benefits, has raised sensitivities around the world. In particular, there is of commodity exporters and Asian countries are the other countries, primarily the U.S. in recent years. Short mirror image of the growing current account deficits of of aggressive and potentially destabilizing curtailment rising opposition in many countries to the control or major stakes that state-controlled SWFs are taking in tion to efforts by China’s state-owned oil enterprise foreign private companies. The adverse political reacCNOOC to acquire the U.S. oil firm Unocal in 2005 of current account deficits and surpluses, the challenges introduced by the growth of SWFs are here to stay. While some view these developments as the desirable outcome of deeper financial globalization, there have been growing concerns that the size of SWF portfolios may ultimately destabilize the global financial system. These concerns reflect the view that size matters and and by the United Arab Emirates’ DP World to acquire several major U.S. ports are well known. The Abu Dhabi Investment Authority’s recent $7.5 billion investment in Citigroup prompted less concern, in part because of the Authority’s assurances that it would not seek any control or active management. Emerging markets also that sovereign management may be motivated by nationalistic considerations, deviating from conventional wealth maximization. at times have expressed sensitivity to certain investments by other emerging markets. Temasek’s purchase of a controlling stake in the Thai telecom firm Shin Corp. from the family of then-Prime Minister Thaksin Shinawatra in January 2006 sparked off a political crisis in Thailand. As a result of these concerns, a range of policies have new, reflecting the possibility that a large fund may use its market power strategically, potentially leading to Apprehension about the size effect of funds is not greater financial instability, and occasionally benefiting large players. An example of these concerns is the alleged role of large private hedge funds in coordinating speculative attacks on the British pound and other currencies participating in the European exchange rate mechanism been proposed. Some observers call for imposing strin- gent transparency requirements on SWFs, well above the present requirements on private financial funds suggested that the International Monetary Fund and World Bank play an oversight role to limit the systemic risks of unregulated SWFs, including the formulation of best practice guidelines. Others have proposed greater scrutiny of foreign in the early 1990s. The extra dimension added by SWFs is the possibility that sovereign investors may use their strategic leverage for narrow nationalistic objectives (Truman 2007). In this connection, the U.S. Treasury has (Summers 2007). The concern is that financial globalizasavings may distort sovereigns’ incentives, shifting them tion has reached the point where the sheer size of foreign from beneficial diversification toward zero-sum game government entities seeking operational control of companies in which they invest, particularly if they policies. These may include supporting domestic “naforeign firms with proprietary knowledge, or increasing (telecommunication, energy, ports, etc.). tional champion” firms, buying controlling positions in control of financial and tangible infrastructure abroad Such developments may also lead to the proliferation choose to exercise the voting rights of their equity shares. Accordingly, some have advocated that SWFs should be allowed to invest only in nonvoting equity shares (Buiter 2007). In addition, some call for restricting SWFs’ operations to reciprocal arrangements, where conditioned on granting similar access to foreign funds (Economist 2007). 13 of capital controls and financial protectionism, ultimately the ability of a country to buy foreign assets would be Center for Pacific Basin Studies 2007 Annual Report that economic theory suggests that the diversification be obtained best by buying a share of a “global fund,” suggests that the expanding role of SWFs may be best accommodated by their purchasing shares of a fund composed of the indexes of all the countries forming the Further insight into this issue is gained by noting ping stone towards deeper global diversification, as it benefits associated with increased globalization can composed of all the traded assets of all countries. This may encourage the proliferation of country indexes in globalization. Such a policy could be implemented either countries that are interested in gaining from financial with the guidance of international financial institutions or as the outcome of bilateral negotiations between SWFs and potential recipient countries. global financial system. Such diversification provides the best mechanism for eliminating idiosyncratic risks. Short of engaging in potentially destabilizing zero-sum speculation, large players approaching the size of SWFs with holding such wide “country funds.” References [URLs accessed December 2007.] Aizenman, J. 2007.“Large Hoarding of International Reserves and the Emerging Global Economic Architecture.” NBERWorking Paper 13277. Buiter,W. 2007.“Taming SovereignWealth Funds in Two Easy Steps.”Maverecon -Willem Buiter’s Blog, July 24. http://maverecon.blogspot.com Economist. 2007.“Fear of Foreigners.”August 14 (online only). http://www.economist.com/business/ displaystory.cfm?story_id=9641906 Jen, S. 2007.“How Big Could SovereignWealth Funds Be by 2015?”Morgan Stanley Perspectives, May 4. http://www.morganstanley.com/views/perspectives/articles/5089.html Summers, L. 2007.“Funds that Shake Capitalist Logic.” Financial Times, July 29. Truman, E. 2007.“SovereignWealth Funds:The Need for Greater Transparency and Accountability.” Peterson Institute for International Economics, Policy Brief PB07-6,August. http://www.iie.com/ should not expect to get more than the gains associated Taking the insight provided by this benchmark seri- ously, a policy of encouraging SWFs to invest in wellWilshire 5000, Dow Jones Wilshire Global Total Market solution to challenges associated with SWFs. The rebe unrealistic, due to costly monitoring and collection diversified index instruments, such as the S&P 500, Index, etc., has the advantage of providing a workable quirement for stringent transparency tests of SWFs may of information. Channeling the activities of SWFs into widely diversified country funds offers diversification gains to investors, while minimizing the exposure of a given country to strategic “cherry picking,” that is, selectively buying control in entities due to narrow nationalistic objectives. One may also view it as a step- 14 Center for Pacific Basin Studies 2007 Annual Report Financial Globalization and Monetary Policy which have reduced the cost of holding foreign assets and thereby increased investors’ demand for internationally diversified portfolios, as well as the proliferaMark Spiegel Vice President International Research and Director Center for Pacific Basin Studies tion of sophisticated vehicles for hedging foreign risk exposure that has allowed investors to reduce the riskiness of a given level of foreign exposure. These flows have coincided with a large buildup of net surplus positions by emerging market economies, and, in particular, by emerging Asian nations, whose current account surpluses are now at levels comparable to those that followed the Asian financial crisis. As of the current year, Asian holdings of foreign exchange reserves excluding gold reached close to $3 trillion. These increased capital flows have had a number President and Director of the Center for Pacific Basin Studies, This article is adapted from a speech by Mark Spiegel, Vice delivered at the Bank of Korea’s 15th annual Central Banking Seminar, “Increasing Capital Flows among Countries and 21, 2007. Monetary Policy,” in Seoul, Republic of Korea, September 18My remarks concern monetary policymakers’ opportu- of important impacts on the international economy. In creditors, which has allowed some developed economies, notably the United States, to finance large current account imbalances at relatively favorable rates. nities and challenges in the face of the growing volume of international capital movements. The topic is currently of particular interest for two reasons: First, this year marks the particular, emerging market economies have become net tenth anniversary of the devastating Asian financial crisis, in which issues associated with disruptive capital flows were paramount. Second, world financial markets are currently experiencing substantial turbulence; although it is due primarily to the “subprime” mortgage crisis taking have also played a prominent propagating role. place in the United States, international financial linkages mies being net borrowers from emerging economies, of reasons. First, standard theory suggests that capital products of capital higher than the developed countries This pattern of capital flows, with developed econo- is generally considered to be nonstandard for a couple scarcity in developing countries leaves their marginal as a group. Second, at least for the rapidly growing developing countries, higher expected future incomes provide an incentive to run current account deficits now to smooth consumption. Instead, paradoxically, Scope of financial globalization external assets and liabilities of foreign direct investGDP—took off in both industrial and emerging market economies in the latter half of the 1990s (Lane and Milesi“Financial openness”—the sum of the stocks of the largest net surpluses we observe in the data come as China. ment (FDI) and portfolio investment as a percent of from some of the most rapidly growing countries, such Much work has gone into explaining this paradoxical Feretti 2003). Several reasons underlie these increases in capital movements, including financial innovations, investment pattern. One theory focuses on differences in the quality of financial intermediation between devel- 15 Center for Pacific Basin Studies 2007 Annual Report oped and emerging market economies, where portfolio capital moves from south to north, to return as FDI (e.g., Mendoza et al., 2007). Alternatively, the so-called Bretton serve as collateral against future opportunistic behavior. still have a substantial impact on financial markets. Moreover, as Rogoff (2006) noted, to the extent that central banks in Asian countries as well as in the Woods II school argues that net outflows from China A third approach (articulated in Bernanke 2005), argues in a global “savings glut” that has freed up capital for lending to developed economies. oil-exporting countries target the dollar in their monbe amplified. etary policies, the impact of Fed policy actions will that poor investment opportunities in Asia have resulted Monetary policy responses to financial globalization thorities from enhanced financial integration has led The additional discipline placed on monetary au- Financial globalization and optimal monetary policy had a significant impact on international borrowing The increased volume of trade in financial assets has more countries to pay increasing attention to targeting the inflation rate, formally or informally, as their policy goal. For example, nearly half the OECD countries now formally target inflation, as do ten emerging market terms, as spreads on emerging market bonds have de- creased markedly over time; for example, the Emerging Markets Bond Index yield has fallen from over 16% in 1998 to just over 6% in 2006. While this decline reflects a benign decrease in the cost of borrowing by emerging economies, and the European Monetary Union (EMU) stability” as one of its two monetary policy goals. enunciates an inflation target, while the U.S. cites “price Inflation-targeting regimes have proved to be durable. So far, such regimes, which have existed for over 16 years, have been abandoned only by Finland and Spain, market economies, it also reflects the fact that debt oblisubstitutable than they once were. gations across countries are now being treated as more As financial markets thus become more integrated, the sensitivity of domestic and foreign investors to interest rate differentials increases. Over the last few years, yield curves across nations with comparable default-risk characteristics have converged. In this environment, longerterm real interest rates are likely to be less sensitive to transitory movements in the Fed’s policy rate, the federal funds rate, suggesting that financial globalization has left interest rates less sensitive to monetary policy than in the past. In addition, this increased sensitivity reduces the effectiveness of the inflation tax, which implies that governments should rely less on this revenue-raising instrument, all else equal. Central banks acting in concert, as when several recently Of course, there are some caveats to this contention. moved to inject liquidity into the financial system, can 16 Center for Pacific Basin Studies 2007 Annual Report which did so in order to join the EMU, which itself has an inflation target (Rose 2007). The increased focus on price stability has not been reduce the risk of disruptive “sudden stops” in credit that have resulted in costly failures in the past. Fourth, government issues in local currency have helped enproviding “benchmark” yield curves for pricing primarkets, contagion is limited by the wide dispersion of creditors. limited to formal inflation-targeting regimes. In 1998 courage the development of local bond markets by vate debt. Finally, when defaults do take place in bond average inflation rates for a representative group of emerging market economies stood at 16% higher than those prevailing in industrial countries. By 2006, that gap had been reduced to 6%, or just 4% above average levels in industrial countries. edly in emerging market economies. Standard economic theory suggests that the variability of inflation, rather than its level, is key to determining output volatility. In practice, high inflation tends to coincide with variable inflation, which is why keeping the rate of inflation under control is usually sufficient to control its variability as well. Over the preceding ten years, as average The variability of inflation has also declined mark- Financial globalization and emerging market economies for acquiring capital at more favorable interest rates, it While financial globalization raises opportunities also brings new challenges for emerging market economies. In particular, globalization raises the possibility of exacerbated exchange rate volatility, which can be a may suffer terms of trade shocks from real exchange inflation rates fell in emerging market economies, the well (see Figure 1). source of output variability; that is, emerging economies rate changes when nominal exchange rate movements are not passed through to changes in domestic prices. ary pressure through increased import prices. Finally, Exchange rate depreciations can also lead to inflationas many emerging market economies continue to variability of inflation in those countries has fallen as The renewed focus on controlling inflation and inflation expectations has led to improved conditions in capital markets. Emerging market economies have “hard” currencies towards external borrowing in bonds moved from bank borrowing in external so-called denominated in their domestic currencies with rela- have liabilities denominated in dollars, exchange rate as exchange rate movements raise the relative value a whole. depreciations can lead to “currency mismatch” issues, of liabilities and damage the nation’s balance sheet as These issues are often raised in discussions of the tively long maturities and fixed interest rates. Korea and Thailand introduced 10-year domestic-currency bonds in the 1990s, while, by the year 2000, Brazil, Chile, Codomestic currency bonds (Kroszner 2007). As these lombia, Indonesia, Mexico, and Russia had also issued instruments have become more standard, their yields favorable terms. impact of financial globalization because some believe that emerging market central banks that pursue price have decreased, allowing these countries to borrow at This shift has achieved several desirable effects. First, stability, or even formal inflation targets, leave thembehind this concern is the so-called “impossible trinity,” selves open to exchange rate volatility. The intuition which notes that a country cannot simultaneously pursue price and exchange rate targets while maintaining as Rose (2007) have found that countries that target open capital accounts. However, recent studies, such inflation experience no more exchange rate volatility on 17 currency risk has been shifted from borrower to lender. Second, the fixed interest rates have shifted interest rate risk to creditors as well. Third, the longer maturities Center for Pacific Basin Studies 2007 Annual Report average than do countries that do not target inflation. Reversed.” Journal of International Money and Finance 26(5) (September), pp. 663–681. Conclusion source of market discipline and, as Mishkin (2000) has pointed out, encouraged central banks to concentrate on stabilizing prices and not on stabilizing output. In Financial globalization has provided an additional practice, this change in policy has resulted in the benign rates, and reduced borrowing costs worldwide. results of decreased output volatility, lower inflation References Bernanke, Ben. 2005.“The Global Savings Glut and the U.S. Current Account Deficit.”The Homer Jones Lecture, St. Louis, Missouri,April 14. http://www.federalreserve.gov/boarddocs/ speeches/2005/200503102/default.htm Kroszner, Randall S. 2007.“Globalization and Capital Markets: Implications for Inflation and theYield Curve.” Speech at the Center for Financial Stability (CEF), Buenos Aires,Argentina. http://www.federalreserve.gov/boarddocs/ Speeches/2007/20070516/default.htm Lane, Philip R., and Gian Maria Milesi-Ferretti. 2003. “International Financial Integration.” IMF Staff Papers 50, Special Issue, pp. 82–113. Mendoza, Enrique G.,Vincenzo Quadrini, and JoseVictor Rios-Rull. 2007.“Financial Integration, Financial Deepness, and Global Imbalances.”NBER Working Paper 12909. Mishkin, Frederic S. 2000.“Inflation Targeting for Emerging Market Countries.” American Economic Review 90(2) (May), pp. 105–109. Rogoff, Kenneth S. 2006.“Impact of Globalization on Monetary Policy.” In The New Economic Geography: Effects and Policy Implications, Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole,Wyoming,August 24–26, 2006. Rose,Andrew K. 2007.“A Stable Monetary System Emerges: Inflation Targeting Is BrettonWoods 18 Center for Pacific Basin Studies 2007 Annual Report The U.S. Productivity Acceleration and the Current Account Deficit debate about what the likely path back toward balance will look like. Some argue that foreign investors’ willingness to finance the deficit may shift abruptly, Diego Valderrama Economist which would disrupt the U.S. economy (Valderrama 2006). Others think that the current situation is simply a result of market forces and that the return to balance will be gradual and orderly. To disentangle the two points of view, it is important that the U.S. current account deficit for 2006 increased from On March 14, the Bureau of Economic Analysis reported the previous year to over 6% of GDP. This deficit reflects to consider the factors that may explain the current the difference between U.S. income and expenditures, elevated level of the current account deficit. These and the additional indebtedness that the country needs the current account consists mainly of the trade balance, but it also includes the payments on returns from foreign ers for returns on assets they own in the United States. U.S.-owned assets, net of the payments made to foreignThough many economists and policymakers agree include: the “saving glut,” which characterizes the high saving rates observed in developing countries (particularly in Asia) that have pushed international interest rates lower, depressed U.S. saving, increased expenditures, and fueled borrowing from abroad; the depressed values of some foreign currencies relative cheap, encouraged domestic expenditures, and thereby to the dollar that have made U.S. imports relatively increased the trade and current account deficits; and deficit is a result of the growing U.S. budget deficit, rowing from abroad. to take on to cover this difference. As Figure 1 illustrates, that a persistently high current account deficit, or worse, a growing one, could prove worrisome, there is much the “twin deficits” story, wherein the current account which has reduced public saving and increased borThere is, however, another factor to consider, which so far has received relatively little attention in the growth in U.S. labor productivity since 1996, when press and in policy circles--the increase in the rate of the current account deficit was only about 1% of GDP. account deficit and its determinants, and describes the trend labor productivity growth. This article reviews the current facts about the current channels through which it is affected by an increase in 19 Center for Pacific Basin Studies 2007 Annual Report Decomposing the U.S. current account count. For example, using national account identities, the current account can be viewed as the difference between Figure 2 shows how these two factors have evolved since There is more than one way to look at the current ac- U.S. labor productivity acceleration and the current account deficit ductivity growth began accelerating in 1996 to nearly twice the earlier pace, and it has averaged 2.7% per year sociated with improvements in technology occurring as ever since. The source of this acceleration has been asa result of the IT (information technology) revolution as well as improvements in business processes, inventory management, and retailing. It is also well known that, After 15 years of tepid performance, U.S. labor pro- U.S. gross saving (public and private) and investment. 1980 (each as a fraction of GDP). Between 1991 and 1995 the investment rate increased faster than the saving rate, 1996 most of the expansion in the deficit can be accounted for by a large drop in the gross saving rate. causing rising current account deficits. However, since among the other G-7 industrial countries (Canada, Japan, France, Germany, Italy, and the United Kingdom), this higher trend rate so far. the United States is the only one to have experienced Some economists have begun to ask whether this productivity acceleration could have contributed to the burgeoning current account deficit. Viewing the curdecomposition is a particularly useful way to answer affect the current account because it may both increase the investment rate and lower the saving rate. Consider a two-country world where productivity rent account through the lens of the saving-investment this question. Accelerating productivity growth could growth accelerates in the domestic economy but not in the foreign one. Since domestic workers are expected to be more productive, each unit of capital they use will also be more productive. A productivity acceleration Another way to look at the U.S. current account deficit thus raises the investment rate, because investors, both domestic and foreign, want to take advantage of the higher rate of return to domestic capital. When domestic firms increase their investment, they is to examine its counterpart, that is, the current account surplus of the rest of the world. During the last decade, investment in Europe, Japan, and many developing coun- tries in Asia has been low, leading to a greater current current account deficit in the United States. seek to borrow to finance it. If the increase in desired account surplus in the rest of the world and to a higher borrowing could be supplied from domestic saving, then domestic saving itself is likely to be depressed by the labor productivity acceleration. An increase in labor productivity growth not only tends to raise the return on productive workers, thus increasing income. Because the current account would be unchanged. However, capital, but it also tends to raise the wages of the more 20 Center for Pacific Basin Studies 2007 Annual Report individuals know that their incomes will be higher and expenditures immediately. Since income will be higher tomorrow than it is today, desired expenditures will increase by more than income, depressing the saving rate, leaving insufficient domestic funds from which domestic will grow at a faster rate, they will want to increase their it is natural to ask why the adjustment is still ongoing, ten years later. There are several possible explanations. One is that savers, or potential savers, did not immediately recognize the increase in the trend growth rate of labor productivity. Edge, Laubach, and Williams (2004) point out that this trend is hard to measure since yearly changes firms can borrow. Therefore, to increase their investment, domestic firms will borrow from abroad, and the current account will move into deficit. When foreign residents increase their investment in domestic firms, this, too will move the current account into deficit. in productivity data are very volatile. Therefore, they argue, individuals incorporate new information slowly as they learn about changes in the underlying growth rate. If this argument holds, then it would suggest a muted initial response to the acceleration of consumption, saving, and investment and an extension of it for extend the current account response. many years. In turn, this learning would mute and Another explanation for the slow response of the time income and saving itself can be significant. Supgrew at the same rate as labor productivity, 1.5%; then, it would take income approximately 45 years to double. The impact of the increased income growth on life- pose that before the productivity acceleration, income Now suppose that income growth increased to 3%; that implies that income would double in approximately 23 rate as labor productivity, it is likely that the productivity acceleration would produce a sizeable increase in current account deficit is that there are many barriers and frictions in the economy that slow the incorporation of new productive processes into the economy. It years. Even if income were not to increase at the same takes time to find the most productive task for workers, to build new plants, and to redesign business processes to take advantage of the increased productivity, so investment cannot quickly adjust to take advantage of the higher rate of return. Thus, economic output will also take time to fully incorporate the new processes, dampening the response of the saving rate. Consequently, if the current account. lifetime income and that this increase can account for a large fraction of the saving rate decline and the increase in the current account deficit observed since 1995. Ferguson (2005), then Vice Chairman of the Federal Reserve Board, stated that, based on results obtained using an economic forecasting model of the Board, it was likely that the increase in U.S. productivity growth existing current account deficit. The other factor he cited was the low level of investment expenditures in foreign countries. saving and investment adjust only gradually, so will was one of the two most important factors behind the How may the current account return to balance? reached its current elevated level is useful in understanding how it may return to balance. If productivity growth played a large role in explaining the current deficit, then future changes in productivity growth current account. Understanding how the current account deficit Why has it taken the current account so long to adjust? justment of the current account should happen when the Economic theory would suggest that most of the ad- acceleration in productivity growth occurs, particularly will most likely be important for the evolution of the If the productivity acceleration is permanent, then, because the saving rate should respond immediately. So, 21 Center for Pacific Basin Studies 2007 Annual Report as income increases, the saving rate will also improve. This is because individuals will already have taken advantage of the increase in their lifetime income by borrowing early on and will eventually start to pay back their loans. This will tend to bring the current account References [URLs accessed March 2007.] Edge, Rochelle M.,Thomas Laubach, and John C. Williams. 2004. “Learning and Shifts in Long-Run Productivity Growth.” FRBSF Working Paper 2004-04 (March). http://www.frbsf.org/ publications/economics/papers/2004/wp04-04bk.pdf Ferguson, Roger W. 2005. “U.S. Current Account Deficit: Causes and Consequences.” Remarks to the Economics Club of the University of North Carolina at Chapel Hill, Chapel Hill, North Carolina. April 20, 2005. http://www.federalreserve.gov/ boarddocs/speeches/2005/20050420/default.htm Valderrama, Diego. 2006. “What Are the Risks to the United States of a Current Account Reversal?” FRBSF Economic Letter 2006-29 (October 27) http://www.frbsf.org/publications/economics/ letter/2006/el2006-29.html into surplus smoothly. Similarly, if individuals expect the trend growth rate of labor productivity to return to its old level slowly, the saving rate will increase (perchange) and, again, the current account will smoothly turn to balance. haps somewhat faster than in the case of a permanent pectedly decreases, the adjustment will be much faster, However, if the trend productivity growth rate unex- because individuals will have taken on too much debt. In that case, consumption may even drop quickly to bring up the saving rate and shrink the current account deficit. Such rapid adjustments in the current account have been associated with economic slowdowns in many developing and industrialized countries. Conclusions particularly since 1996. At the same time, the U.S. labor The U.S. current account deficit has grown rapidly, productivity growth rate has almost doubled. This productivity acceleration can potentially account for a large fraction of the current account increase through its impact on saving and investment. It will be important productivity to give them a better understanding of return to balance. for economists and policymakers to study the role of the current situation and how the current account may 22 Center for Pacific Basin Studies 2007 Annual Report The Asian Financial Crisis Ten Years Later: Assessing the Past and Looking to the Future Bank President with responsibilities for overseeing Speech to the Asia Society of Southern California Los Angeles, California February 6, 2007 Janet Yellen President and Chief Executive Officer Good afternoon. On behalf of the Federal Reserve financial institutions, I have an even greater awareness of how these issues remain vital for maintaining financial stability today. vide some background for the discussions that will take place in the follow-up events marking the tenth anniversary of the crisis. Let me note that, as usual, In my remarks this afternoon, I would like to pro- these comments are my own and do not necessarily represent the views of my colleagues in the Federal Reserve System. I will first review the major strands highlighting some of the vulnerabilities that were conaffected countries today and examine how their policy financial environment. I will round out my remarks of thought in the literature on the causes of the crisis, tributing factors. Then I will turn to conditions in the responses to the crisis have shaped the current Asian with some thoughts on lessons learned, particularly for international financial institutions, and observations on China in the current environment. Bank of San Francisco, the Asia Society of Southern California and the Pacific Council on International Policy, I’m delighted to welcome you all here. This is ferences the San Francisco Fed will be involved with the first in a series of presentations, seminars, and conover this year as we explore various facets of the Asian financial crisis, focusing on the stability and resiliency of financial sectors today and remaining challenges in the future. dent Clinton’s Council of Economic Advisers, and, as At the time of the crisis, I was the Chair of Presi- you may imagine, it was definitely a “front-burner” issue for us. As the crisis spread from country to country, there was deep concern about how big the impact would be on the U.S. economy, and the markets certainly were jittery: that October, the Dow Jones Industrial Average plunged over 500 points. For the five Asian nations most associated with the crisis—Thailand, Koin both human and economic terms was enormous: in rea, Indonesia, the Philippines, and Malaysia—the toll 1998, these countries saw their economies shrink by an really a single Asian crisis, but rather several crises. The afflicted countries obviously differ very much from one another, both in terms of their levels of ecoTherefore, the causes of the crises and, likewise, the Before I begin, I should note that the subject is not nomic development and their institutional features. policy reforms that have been adopted in the last 10 years are not uniform for the region as a whole. Nonein these developments, and I will try to draw them out. ••• theless, there are some important overarching themes average of 7.7 percent and many millions of their peothe crisis had revealed new sources of risk in the international financial architecture. Now that I am a Reserve ple lost their jobs. More broadly, there was concern that in Asia was in many ways very different from others. Let me begin by looking back. The financial crisis For example, earlier in the 1990s, both Mexico and 23 Center for Pacific Basin Studies 2007 Annual Report Argentina suffered financial crises, largely stemming from their unsustainably high budget deficits and selling. Thus, in this view, whether or not the loss of prophecy, as the downward pressure on Asian asset mentals that investors feared. 2 soaring inflation. By contrast, in most of the affected Asian countries, during the years leading up to the crisis, growth in economic activity was strong, inflation was relatively tame, investment was robust, and, with to be in order. their budgets in surplus, their fiscal houses appeared Indeed, these countries had enjoyed extraordinari- confidence was warranted, it became a self-fulfilling prices ultimately led to the deterioration in fundaThe second view focuses more on the vulnerabili- ties that existed in these nations’ economic fundamenOne such vulnerability was the pursuit of risky lending practices by financial intermediaries. In part this was due to problems with the quality of supervision and regulation of the financial sector. For example, in tals, which threatened to lead to solvency difficulties. ly fast growth for decades. As their success grew, the international community encouraged them to open their economies to foreign capital and to liberalize their financial sectors, and there was movement in that direction beginning in the late 1980s. With freer capital markets and fewer distortions in the financial sector, foreign capital flooded in, typically as short-term loans to banks; by 1996, capital inflows had grown to $93 billion. 1 Thailand in the early 1990s, although regulatory requirements for banks were rigorous, actual enforcement of those requirements was less so—sometimes ulation of nonbank financial institutions was almost nonexistent. But the problem also lay with the long tradition of so-called “relationship lending.” Rather far less so, according to some studies; moreover, reg- den stop” in East Asia—that is, the year that foreign with capital, but, in fact, reversed course and pulled became over $12 billion of outflows? How, then, did 1997 become the year of the “sud- investors not only stopped flooding these countries capital out, in a dramatic way, as $93 billion of inflows The literature exploring this question is massive, than basing lending decisions on sound information about the fundamental economic value of specific investment projects, banks and other financial intermediaries based them on personal, business, or governmental connections. As a result, bank loan portfolios became particularly risky. And these risks became grim realities when economic conditions slowed in these countries in early 1997, as many firms, such as the Korean chaebols I mentioned, faced serious financial difficulties. 3 and has generally offered two kinds of explanations, which are not necessarily mutually exclusive. Accord- ing to one view, this situation is best characterized as a “liquidity” crisis—much like a banking panic, where not, become a self-fulfilling prophecy as their withdrawals en masse bring the bank to ruin. In the case of the East Asian economies, foreign investors may depositors’ fears about insolvency, well-grounded or before the crisis, foreign investors poured money into In spite of the risky lending practices that prevailed these countries at record rates. Their willingness to do so appears to have stemmed in part from a second area of vulnerability—a perception that the governforestall bank failures. Here Korea provides a parbanks were able to build up huge liabilities before the have lost confidence in their fundamental soundness, perhaps because of news about the failures of the Korean chaebols Hanbo and Sammi Steel, as well as of Thai nonbank financial institutions. This loss of confidence could have led investors to unload their holdings of those countries’ securities in a kind of panic- ments of these nations stood ready to intervene to ticularly clear example. Foreign branches of Korean crisis, partly because foreign creditors correctly per- 24 Center for Pacific Basin Studies 2007 Annual Report ceived that if their parent banks found themselves in crisis—they would receive assistance from the Korean financial difficulty—as they did after the onset of the government. Indeed, one study documents that foreign creditors began refusing to refinance their outstanding obligations when the level of these liabilities began to 4 cy depreciations had devastating consequences due to the prevalence of “currency mismatches.” These firms had been issuing dollar-denominated liabilities existed because both domestic banks and their client to finance their investments, whose returns were dethese unhedged positions either because they had few other options, or, because at the time, they assumed 6 approach the Korean government’s holdings of foreign reserves. When foreign creditors refused to roll over placed by capital outflows. their short-term loans, capital inflows were quickly reThis brings me to a third vulnerability—explicitly nominated in local currencies. Presumably, they held that the pegs would hold. In any event, once the pegs collapsed, their balance sheets deteriorated severely, leaving them unable to service their debt obligations when their creditors refused to roll over their dollar liabilities. ••• or implicitly pegged exchange rate regimes, which are subject to speculative attacks if the markets perceive that the true value of the currency is misaligned with its pegged value. One explanation for the attacks that drove currency values down in Asia is tied to concerns 5 about possible big government bailouts of the strained tations that the Asia crisis nations would stage a full and fast recovery were, frankly, not very high. Yet, remarkably, a full and fast recovery is exactly what hap- With their economies at such a low ebb, the expec- banking sector. If foreign investors expected that the bailouts would lead to high fiscal deficits, that expectation, in turn, would raise concerns that the governments might force their central banks to monetize their rency values. deficits, resulting in higher inflation and depressed curAs we all know, the speculative attacks on exchange pened. Between 1999 and 2005, these nations enjoyed average per capita income growth of 8.2 percent and foreign direct investment booming at an average an7 investment growth averaging nearly 9 percent, with nual rate of 17.5 percent. Moreover, all of the loans associated with the International Monetary Fund’s assisand the terms of those programs have been fulfilled. tance programs during the crisis have been paid back At least part of this success is likely due to policy rate pegs appeared to spread from one country to another, a phenomenon now commonly referred to as “contagion.” Take the case of the attack on the Korean the Taiwanese dollar was devalued. One explanation won that occurred shortly after the Thai baht fell and for it hinges on trade competitiveness; that is, speculamore willing to let the won depreciate once the other currencies had fallen in order to stay competitive with its Asian neighbors. Alternatively, speculators might changes that have gone some way toward addressing the vulnerabilities I discussed. One such policy change tors might have expected the Korean government to be has been an increasing shift away from targeting exinflation rate. Korea moved in this direction in 1998, change rates and toward targeting an explicit desired followed by Thailand in 2000 and Indonesia in 2005. Changing the anchor for these countries’ monetary and foreign exchange policies has helped to mitigate the possibility of currency mismatches by encouraging private agents to hedge their currency positions, while also allowing for greater domestic flexibility in response to external shocks. have expected that the crises in those countries would worsen Korea’s export prospects, leading to an ecopressure on the won. nomic downturn in Korea which would put downward Whatever the source of the contagion, the curren- 25 Center for Pacific Basin Studies 2007 Annual Report manage their exchange rates to some extent. In fact, Now, it should be admitted that these countries still Korean commercial banks have also adopted Westernboard members are outside directors, and they have recent moves by the Thai government indicate an increased emphasis on this issue. After a series of forpressure on the baht last year, the Thai government imposed controls on capital inflows last month, first limiting sales of short-term securities to foreign investors and then imposing a de facto tax on portfolio capital inflows by requiring 30 percent of inflows to be placed in a non-interest bearing “reserve account,” refundof Thai equities forced the government to repeal some of the controls the next day, its determination to limit exchange rate movements appears to have increased. eign exchange interventions failed to stem the upward style board governance systems, where the majority of reformed their executive compensation processes, with banks introducing or strengthening executive stock 11 option programs geared towards tying compensation more closely to bank performance. Korean banks also quickly cleansed their balance sheets of nonperforming loans. Among the other crisis nations, supervision and ac- able in full only after a year. While an investor sell-off counting transparency also have improved, and banks in Thailand, Malaysia, and the Philippines have succeeded in ridding their balance sheets of nonperforming loans. However, recent studies suggest that there are still change rate movements has been through intervention between 1997 and 2005, foreign exchange holdings in lion. 8 The more typical way for these countries to limit ex- weaknesses in enforcement, as there were before the critightening accounting standards. Nevertheless, compared to 1997, significant progress has been made. Indonesia has rebuilt and recapitalized its devastated banking sector. Malaysian banks’ new emphasis on lending to consumers and small and medium-sized enterprises 12 sis, which limits the regulatory gains achieved through and the accumulation of dollar reserves. As a result, the five crisis countries quadrupled to over $378 bilWhile efforts to limit exchange rate appreciation may be motivated in part by competitiveness considerations, this build-up in reserves may also be motivated by memories of the crisis, as these funds could be used to smooth the effects if another “sudden stop” 9 has moved them away from relationship-based lendbrought its previously unregulated finance companies under central bank supervision. Another step towards decreasing the extent of bank- ing that was the norm prior to the crisis. Thailand has occurred. In any event, it is fair to say that the East Asian nations as a group have come a long way towards achieving exchange rate flexibility and price centered finance and the scope of implicit government local currency bond markets. Prices in these markets guarantees on investment has been the development of adjust to changes in perceived risk automatically and in stability compared to where they were in the 1990s, and the improved macroeconomic conditions likely have played a role in their superior performance and in their renewed attractiveness as destinations for foreign direct investment. ways that can pose substantially less systemic risk than foreign-currency-denominated short-term loans. This solution complements the other reforms, because, in order to function well, bond markets require timely, honest, and credible reporting of firms’ financial circumstances—in other words, a transparent, well-regulated, rowing in bonds from a large number of creditors could and well-functioning set of capital markets. Thus, borreduce the relationship lending problems believed to moved to improve banking supervision and regulation and to introduce more market discipline since the sion of financial institutions is especially significant. crisis. Korea’s progress in strengthening its supervi- Korea, Malaysia, Thailand, and Indonesia have also 10 26 Center for Pacific Basin Studies 2007 Annual Report have played a role in poor lending decisions made by argued that developed local bond markets could make better manage risk in their lending portfolios. 13 Asian banks before the crisis. Indeed, some have even it less costly to securitize bank loans and help banks To promote the development of local currency bond 14 tal accounts should be gradual and carefully managed. Failure to do so can expose the regulatory and moral hazard difficulties experienced in Asia. namely, that its adjustment programs should be tailored to individual nations’ characteristics. 15 Another lesson is one that the Fund has learned, For example, markets, a group of regional central banks launched the first stage of an “Asian Bond Fund” in 2003. To some critics have charged that while the austerity measures it advocated may have worked well in other financial crises, in the case of Asia they may have actually exacerbated the downturn. Although that claim remains controversial, the Fund has adopted new guidelines to 16 date, however, this Fund has not led to much growth in bond trading and issuance, in part because the fiscal prudence in a number of Asian countries has meant that too few government bonds are available to form a vibrant market in public debt securities. This in turn limits the corporate bond market, since government ensure that its adjustment programs are shaped by individual country characteristics and that local authoriFund-supported lending programs going forward. ties have a voice in steering adjustment policies during A third lesson is that transparency concerning both bonds add to the overall volume of bonds issued in that currency and thereby increase overall market liquidity. Bond market growth also requires a solid financial infrastructure, including a sound legal structure, effective credit ratings agencies, and a strong institutional investor base. Countries that develop this meaningful growth in local bond markets. ••• overall macroeconomic conditions and individual firm accounting is needed to guide successful domestic investment decisions. Here, too, the Fund has adapted by strengthening its international surveillance activities to provide early warnings of impending crises. In 1999, the Fund, together with the World Bank, launched the Financial Sector Assessment Program, with the aim of assisting emerging market economies in identifying weaknesses in their domestic financial sectors. infrastructure will likely have a better chance at seeing the Asia-crisis nations have made to strengthen their But even with these measures in place—indeed, even So far I have discussed several policy changes that financial systems and thereby avoid another crisis. with eventual improvements in these measures—there Therefore, an assessment of the state of Asian financial sis, there have been other crises, and these, too, have Of course, in the decade since the Asian financial cri- will always be some residual risk of systemic crises. markets today must include an examination of the capability of the international financial architecture and its major institution, the International Monetary Fund, to handle future financial crises. Some lessons have clearly been learned. One relates led to some reforms in the international architecture. A notable episode was the Argentine crisis of 2002. This was the first large modern default where creditors were not primarily banks, as they were in Asia, but rather a multitude of bond claimants from many countries. On the positive side, the contagion issues that were prevalent in Asia did not arise, as the Argentine risk was well to the conditions for opening a country’s capital markets. With a strong financial system, the arguments in favor of unfettered capital flows are strong. But durvulnerabilities, the path to the liberalization of capi- diversified across a large group. On the negative side, renegotiation efforts were hindered by the need to addisparate set of claimants. dress the economic and legal differences of a large and Anticipating the challenges raised by the movement ing a transition from a financial system with evident 27 Center for Pacific Basin Studies 2007 Annual Report toward predominantly bond-based finance from bank- based finance, the Fund has explored the question of renminbi, permitting it to appreciate by 6.5 percent lending workouts; it has even considered the possibility of formalizing sovereign debt renegotiations with mechanisms analogous to the bankruptcy procedures against the dollar since it was officially unpegged in July 2005, it is still much less flexible than the currencies of the Asia crisis countries. The central bank has resisted pressures for more rapid appreciation of the that prevail in domestic bond markets. For now, however, it appears that the problems of renegotiating with a broad set of claimants are being addressed in a less centralized manner, as governments such as Mexico action clauses” that establish at issue the procedures for orderly renegotiation in the event of default. ••• have successfully issued bonds containing “collective renminbi by intervening in the foreign exchange market and building up its holdings of foreign reserves. Limiting appreciation of the currency in this manner complicates the use of monetary policy to produce economy. an orderly slowdown in China’s currently booming As an emerging leader within the region, China after the financial crisis, one must consider the ascendance of China as a key economic power in the region. I did not mention China earlier in my discussion because In assessing financial conditions in Asia ten years could also play a major role in promoting regional exchange rate flexibility. For example, Thailand’s Finance Minister recently argued that his nation’s ecoof renminbi revaluation. If China were to move more nomic conditions would be helped by a faster pace quickly, it could well encourage even greater exchange rate flexibility among the East Asian fledgling inflagoal of reaching price stability without losing export competitiveness. tion-targeters, as they would be able to pursue their China was not drawn as deeply into the financial crisis that spread through the region, even though it, too, had problems with its financial sector. The reason it stood apart is that it differed from the crisis countries in two important respects. First, its capital account was more closed, and second, much of the foreign investment in many cases involved actual plants and factories— “steel in the ground.” Today, despite China’s recent successes, it still shares some of the vulnerabilities faced although it has made significant progress in reforming by the Asia crisis countries in the 1990s. For example, its banking sector through reducing nonperforming was not short-term loans but direct investment, which of sound financial policies, including strong accounting principles and adequate regulatory oversight, as well as the importance of sound macroeconomic In conclusion, the crisis illuminated the importance policies, including exchange rate flexibility. The good group have made great progress in these areas. Still, there are reasons to believe that continued vigilance will be required to prevent or ameliorate crises in the news is that, since the crisis, the Asian countries as a loans, the government still has a degree of influence in Chinese bank lending decisions, and some have expressed continuing concern over the health of the bank- future. First, there is some risk that the policy reforms that were achieved in the wake of the disastrous crisis gional prosperity. Second, private agents may respond ment by dropping some of the prudent investment practices that were adopted following the crisis. could be scaled back in the current era of relative reto the relatively tranquil current economic environ- ing sector. Commenting on the challenges China faces in its corporate governance and accounting standards, 17 Chairman Bernanke noted recently that progress has been made in these areas, but large benefits could be achieved from further concentration on these issues. While China has increased the flexibility of the The Asian financial crisis had a profound effect on 28 Center for Pacific Basin Studies 2007 Annual Report the people and economies of the region. For that reason, it is worthwhile exploring the fundamental causes of the 12. For example, see Ball, et al. (2003). crisis, the recovery paths countries have adopted, and stability of the financial system. The two conferences in more deeply into these issues. By looking ahead with portant insights for countries within the region, for the ing market economies around the world. 13. Eichengreen and Luengnaruemitchai (2004). any current vulnerabilities that could undermine the June and September at the San Francisco Fed will delve that tumultuous event in mind, we hope to provide imU.S. and Europe, their trading partners, and for emerg- 14. This group is known formally as the Executives’ Meeting of East Asia-Pacific Central Banks and Monetary Authorities, and it includes Australia, China, Hong Kong, SAR, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, and Thailand. 15. For example, see Independent Evaluation Office of the IMF report on “The IMF and Recent Capital Account Crises: Indonesia, Korea, Brazil,” (2003). 16. Stiglitz (2002). 17. Bernanke (2006). Endnotes 1. 2. 3. 4. 5. 6. Source: Radelet and Sachs (1998). These inflows correspond to 8.32% of GDP for the five Asian nations in 1996 (based on World Development Indicators). See Chang and Velasco (2000), which analyzes the Asian financial crisis by building directly on old models of bank runs. Radelet and Sachs (1998). Dooley and Shin (2001). References Aizenman, Joshua, and Jaewoo Lee, (2005), “International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence,” NBER Working Paper no. 11366. Ball, Ray, Ashok Robin, and Joanna Shuang Wu, (2003), “Incentives versus Standards: Properties of Accounting Income in Four East Asian Countries,” Journal of Accounting and Economics, 36, 235-270. Bernanke, Ben, (2006), “The Chinese Economy: Progress and Challenges,” remarks at the Chinese Academy of Social Sciences, Beijing, China, December 15. Burnside, Craig, Martin Eichenbaum, and Sergio Rebelo, (2001), “Prospective Deficits and the Asian Currency Crisis,” Journal of Political Economy, 109(6), 1155-1197. Chang, Roberto, and Andrés Velasco, (2000), “Financial Fragility and the Exchange Rate Regime,” Journal of Economic Theory, 92, 1-34. Choe, Heungsik, and Bong-Soo Lee, (2003), “Korean Bank Governance Reform After the Asian Financial Crisis,” Pacific Basin Finance Journal, 11, 483-508. Corsetti, Giancarlo, Paolo Pesenti, and Nouriel Roubini, (1999), “What Caused the Asian Currency and Financial Crisis?,” Japan and the World Economy, 11, 305-373. Dooley, Michael P., and Inseok Shin, (2001), “Private Inflows when Crises Are Anticipated: A Case Study of Korea,” in Glick, Moreno, and Spiegel, eds., Financial Crises in Emerging Markets, Cambridge University Press, New York, 243-274. Eichengreen, Barry, and Pipat Luengnaruemitchai, See, for example, Corsetti, Pesenti, and Roubini (1999) and Burnside, Eichenbaum, and Rebelo, (2001). 7. 8. 9. Some Asian banks did denominate their loans in dollars. However, their claims were still primarily on firms that earned revenues in local currency. As such, in the wake of a local currency depreciation, the quality of these loans deteriorated as default risk increased. In this way, even banks that issued local loans denominated in dollars faced a currency mismatch. Investment measured as gross fixed capital for mation. Figures are from 1999-2005. FDI figures are from 1999-2004. ECB Occasional Paper #43, Annex 1, p. 26, February 2006. 10. Hosono (2005). For example, Aizenman and Lee (2005) demonstrate that holdings of foreign exchange reserves are more closely related to country characteristics, such as the degree of capital account liberalization, that would indicate the need for a precautionary war chest. 11. Choe and Lee (2003). 29 Center for Pacific Basin Studies 2007 Annual Report (2004), “Why Doesn’t Asia Have Bigger Bond Markets?” NBER Working Paper no. 10576, June. Hosono, Kaoru, (2005), “Market Discipline to Banks in Indonesia, the Republic of Korea, Malaysia, and Thailand,” mimeo, Gakushuin University. International Monetary Fund, Independent Evaluation Office, “The IMF and Recent Capital Account Crises: Indonesia, Korea, Brazil,” (2003). Radelet, Steven, and Jeffrey D. Sachs, (1998), “The East Asian Financial Crisis: Diagnosis, Remedies, Prospects,” Brookings Papers on Economic Activity, no. 1., 1-90. Stiglitz, Joseph E., (2002), Globalization and Its Discontents, W.W. Norton and Company, New York. 30 Center for Pacific Basin Studies 2007 Annual Report Other Center Programs “Third Annual Asia-Pacific Economic Association Conference,” Hong Kong University of Science and Technology, Hong Kong, China Center staff participated on the executive committee organizing the “Third Annual Asia Pacific Economic of Science and Technology, Hong Kong, China. This conference included 160 participants, with substanFirst Annual Risk Management Institute Research Conference, “Capital Flows and Asset Prices: the International Dimension of Risk,” Singapore The Center, jointly with the Berkeley-National University of Singapore Risk Management Institute and the Monetary Authority of Singapore organized the first annual meeting of the Risk Management Institute. The conference included sessions on managing both financial and macroeconomic risk, with Association Conference” at the Hong Kong University tial Asian representation. Research presented ranged from papers directly related to Asian policy questions to general papers on economic theory and econometSrinivasan of Yale University, Richard Baldwin of the Graduate Institute of International Studies, Geneva, and Justin Lin, of Peking University. A conference confer/hk07/index.htm. program is available at http://www.apeaweb.org/ rics. Keynote sessions included presentations by T. N. participation by Center staff, as well as an address available at by FRBSF President Yellen. A conference program is http://www.rmi.nus.edu.sg/conferences/ RMC2007/documents/new%20RC%20outline.pdf “National Bureau of Economic Research International Trade and Investment Program Meeting,” Federal Reserve Bank of San Francisco, San Francisco, California The Center hosted the fall meetings of the NBER International Trade and Investment Program. Papers trade. A conference program is available at html Joint Seminar with World Bank on “Capital Flows, Financial Integration and Stability,” World Bank Office, Paris, France The Center, jointly with the World Bank, organized a week-long seminar for senior policymakers on interalso included participation by the Bank of England national financial issues in Paris in April. The seminar and the Bank of France. Reuven Glick was co-director of the workshop and Mark Spiegel participated as a lecturer. This is the ninth consecutive year that the were presented on a variety of topics in international http://www.nber.org/confer/2007/itif07/itif07prg. Center has collaborated with the World Bank in this activity. The workshop sessions discussed the prob- lems of managing capital flows, dealing with financial crises, and conducting monetary policy. The audience included experienced policymakers from developing countries in Asia, Africa, Latin America, and Eastern Europe. 31 Center for Pacific Basin Studies 2007 Annual Report Center Staff Group Vice President Reuven Glick Michele Cavallo Staff Economists Group Vice President International Research Economic Research Department Ph.D. Economics Princeton University, 1979 Formerly Assistant and Associate Professor of Economics and International Business, New York University, 1979-85; Consultant, World Bank, 1982-85; Economist, Federal Reserve Bank of New York, 1977-79 Ph.D. Economics New York University, 2003 Galina Hale Ph.D. Economics University of California, Berkeley, 2002 Formerly Assistant Professor of Economics, Yale University, 2002-06 Diego Valderrama Mark M. Spiegel Director Vice President International Research Economic Research Department Ph.D. Economics University of California, Los Angeles, 1988 Formerly Assistant Professor of Economics, New York University, 1988-94; Consultant, World Bank, 1989-94 Ph.D. Economics Duke University, 2002 Research Associates Chris Candelaria B.A. Economics Stanford University, 2006 Andrew Cohn B.A. Mathematical Economics Pomona College, 2008 Nina Ozdemir B.A. Economics and Mathematics Northwestern University, 2007 Sylvia Papa Executive Assistant 32 Center for Pacific Basin Studies 2007 Annual Report Visiting Scholars 2007 Joshua Aizenman University of California, Santa Cruz Sang-Kun Bae Korea Economic Research Institute Paul Bergin University of California, Davis Eric Fisher California Polytechnic State University Doireann Fitzgerald Stanford University Charles Horioka Osaka University Michael Hutchison University of California, Santa Cruz Kenneth Kletzer University of California, Santa Cruz Andrew Rose University of California, Berkeley Katheryn Russ University of California, Davis Mark Wright University of California, Los Angeles 2006 Joshua Aizenman University of California, Santa Cruz Paul Bergin University of California, Davis Yu-chin Chen University of Washington Michael Hutchison University of California, Santa Cruz Kenneth Kletzer University of California, Santa Cruz Enrique Mendoza University of Maryland Andrew Rose University of California, Berkeley David Weinstein Columbia University 2005 Joshua Aizenman University of California, Santa Cruz Paul Bergin University of California, Davis Thomas Cargill University of Nevada, Reno Pierre-Olivier Gourinchas University of California, Berkeley Michael Hutchison University of California, Santa Cruz Yongseung Jung Kyung Hee University, Korea Kenneth Kletzer University of California, Santa Cruz Andrew Rose University of California, Berkeley Alan Taylor University of California, Davis Mark Wright University of California, Los Angeles 33 Center for Pacific Basin Studies 2007 Annual Report Center Working Papers Recent Center Working Papers are available on the Internet at http://www.frbsf.org/economics/pbc/index.html Number Author 2007 WP32 WP31 Peter Henry Nicolas Magud Carmen Reinhart Kenneth Rogoff Hiroshi Fujiki Akiko Terada-Hagiwara Laura Alfaro Fabio Kanczuk Charles Horioka Junmin Wan Giancarlo Corsetti Luca Dedola Sylvain Leduc Andrew Atkeson Ariel Burstein Michael Tomz Mark L.J. Wright Title Capital Account Liberalization: Theory, Evidence, and Speculation Capital Controls: Myth and Reality, A Portfolio Balance Approach to Capital Controls Financial Integration in East Asia Optimal Reserve Management and Sovereign Debt The Determinants of Household Saving in China: A Dynamic Panel Analysis of Provincial Data Productivity and the Dollar WP30 WP29 WP28 WP27 WP26 WP17 Pricing-to-Market, Trade Costs, and International Relative Prices Do Countries Default in “Bad Times”? 2006 WP41 WP40 Jaime Marquez John Schindler Michael Devereux Amartya Lahiri Ke Pang R. Anton Braun Daisuke Ikeda Douglas Joines Charles Engel John Rogers Robert Dekle G. Vandenbroucke David Cook Hiromi Nosaka Exchange-Rate Effects on China’s Trade: An Interim Report Global Current Account Adjustment: A Decomposition WP39 Saving and Interest Rates in Japan: Why They Have Fallen and Why They Will Remain Low The U.S. Current Account Deficit and the Expected Share of World Output A Quantitative Analysis of China’s Structural Transformation Dual Labor Markets and Business Cycles WP38 WP37 WP36 Continued on Next Page 34 Center for Pacific Basin Studies 2007 Annual Report Center Working Papers Number Author WP35 WP33 WP32 WP25 WP21 WP17 WP13 WP05 WP02 Philippe Bacchetta Eric van Wincoop Andrew Rose Mark M. Spiegel Jess Benhabib Mark M. Spiegel Galina Hale Cheryl Long Carlos Arteta Galina Hale John Fernald Brent Neiman Galina Hale Cheryl Long Kenneth Kletzer Yongseung Jung Title Incomplete Information Processing: A Solution to the Forward Discount Puzzle Non-Economic Engagement and International Exchange: The Case of Environmental Treaties Moderate Inflation and the Deflation-Depression Link FDI Spillovers and Firm Ownership in China: Labor Markets and Backward Linkages Sovereign Debt Crises and Credit to the Private Sector Measuring the Miracle: Market Imperfections and Asia’s Growth Experience Is There Evidence of FDI Spillover on Chinese Firms’ Productivity and Innovation? Sovereign Debt, Volatility, and Insurance Monetary Policy Shocks, Inventory Dynamics, and Price-setting Behavior 2005 WP12 Barry Eichengreen Kenneth Kletzer Ashoka Mody Mark M. Spiegel Andrew Rose The IMF in a World of Private Capital Markets WP05 Offshore Financial Centers: Parasites or Symbionts? 2004 WP35 WP34 WP33 WP32 WP31 David Cook Michael B. Devereux Mark L.J. Wright Enrique G. Mendoza Ceyhun Bora Durdu Martin Uribe Vivian Z. Yue Mark Aguiar Gita Gopinath Dollar Bloc or Dollar Block: External Currency Pricing and the East Asian Crisis Private Capital Flows, Capital Controls, and Default Risk Putting the Brakes on Sudden Stops: The Financial Frictions-Moral Hazard Tradeoff of Asset Price Guarantees Country Spreads and Emerging Countries: Who Drives Whom? Defaultable Debt, Interest Rates, and the Current Account Continued on Next Page 35 Center for Pacific Basin Studies 2007 Annual Report Center Working Papers Number Author WP30 WP29 Roberto Chang Andres Velasco M. Ayhan Kose Eswar S. Prasad Marco E. Terrones Fernando A. Broner R. Gaston Gelos Carmen Reinhart Robert Dekle Kenneth Kletzer John Krainer Mark M. Spiegel Nobuyoshi Yamori Title Monetary Policy and the Current Denomination of Debt: A Tale of Two Equilibria How Do Trade and Financial Integration Affect the Relationship between Growth and Volatility? When in Peril, Retrench: Testing the Portfolio Channel of Contagion Deposit Insurance, Regulatory Forbearance and Economic Growth: Implications for the Japanese Banking Crisis Asset Price Declines and Real Estate Market Illiquidity: Evidence from Japanese Land Values WP28 WP26 WP16 36 Center for Pacific Basin Studies 2007 Annual Report Center Staff Pacific Basin Publications 2003 – Present Date 2007 2007 2007 Author Reuven Glick Paul Bergin Mark M. Spiegel Andrew Rose Jose A. Lopez Mark M. Spiegel Title “Global Price Dispersion: Are Prices Converging or Diverging?,” Journal of International Money and Finance 26(5), September, pp. 703-729 “Offshore Financial Centres: Parasites or Symbionts?,” The Economic Journal, 117(523), October, pp. 1,310-1,335 “Foreign Bank Lending and Bond Underwriting in Japan During the Lost Decade,” forthcoming in Proceedings of the 2006 Asian Pacific Economic Association Conference, eds. Kar-Yiu Wong and Yin Wong Cheung, London: Routledge “Market Price Accounting and Depositor Discipline: The Case of Japanese Regional Banks,” Journal of Banking and Finance 31(3), March, pp. 769-786 “Pegged Exchange Rate Regimes—A Trap?,” Journal of Money, Credit, and Banking, 40(4), June 2008, pp. 817-835 “Currency Crises, Capital Account Liberalization, and Selection Bias,” Review of Economics and Statistics 88(4), November, pp. 698-714 “The X-Efficiency of Commercial Banks in Hong Kong,” Journal of Banking and Finance 30(4), April, pp. 1,127-1,147 “Quantitative Easing and Japanese Bank Equity Values,” Journal of the Japanese and International Economies 20(4), December, pp. 699-721 “Determinants of Voluntary Bank Disclosure: Evidence from Japanese Shinkin Banks,” Japan’s Great Stagnation, eds. M. Hutchison and F. Westermann, Cambridge, MA: MIT Press, pp. 103-128 “Capital Controls and Exchange Rate Instability in Developing Economies,” Journal of International Money and Finance, April, pp. 387-412 “Financial Structure and Macroeconomic Performance Over the Short and Long Run,” Macroeconomic Implications of Post-Crisis Structural Changes, eds. L.J. Cho, D.Cho, and Y.H. Kim, Korea Development Institute “Fiscal Sustainability and Contingent Liabilities from Recent Credit Expansions in South Korea and Thailand,” FRBSF Economic Review, pp. 29-41 “The Evolution of Bank Resolution Policies in Japan: Evidence from Market Equity Values,” Journal of Financial Research, Spring, pp. 115-132 “Financial Turbulence and the Japanese Main Bank Relationship,” Journal Financial Services Research, 23, pp. 205-223 “The Impact of Japan’s Financial Stabilization Laws on Bank Equity Values,” Journal of the Japanese and International Economies, 17, pp. 263-282 37 2007 Mark M. Spiegel Nobuyoshi Yamori Reuven Glick Joshua Aizenman Reuven Glick Xueyan Guo Michael Hutchison Simon Kwan Mark M. Spiegel Takeshi Kobayashi Nobuyoshi Yamori Mark M. Spiegel Nobuyoshi Yamori Reuven Glick Michael Hutchison Mark M. Spiegel Jose Lopez Diego Valderrama Mark M. Spiegel Nobuyoshi Yamori Mark M. Spiegel Nobuyoshi Yamori Mark M. Spiegel Nobuyoshi Yamori 2007 2006 2006 2006 2006 2005 2005 2005 2004 2003 2003 Center for Pacific Basin Studies 2007 Annual Report CPBS Pacific Basin Notes Date 12/14/07 11/23/07 8/10/07 7/13/07 3/16/07 3/9/07 2/9/07 3/3/06 3/10/06 5/19/06 10/20/06 11/17/06 11/25/05 9/9/05 8/12/05 7/29/05 4/15/05 2/4/05 1/7/05 12/24/04 11/19/04 11/05/04 FOOTNOTES: 1 1 Author Joshua Aizenman Reuven Glick Mark Spiegel Reuven Glick Janet Yellen Galina Hale Janet Yellen Reuven Glick Thomas Cargill Hal Scott Reuven Glick Mark M. Spiegel Thomas Cargill Mark M. Spiegel Michele Cavallo Reuven Glick Mark M. Spiegel Mark M. Spiegel Reuven Glick Diego Valderrama Thomas F. Cargill Reuven Glick Diego Valderrama Michele Cavallo Diego Valderrama Mark M. Spiegel Janet L. Yellen Title Sovereign Wealth Funds: Stumbling Blocks or Stepping Stones to Financial Globalization? Financial Globalization and Monetary Policy Are Global Prices Converging or Diverging? The U.S. Economy and Monetary Policy Prospects for China’s Corporate Bond Market Update on China: A Monetary Policymaker’s Report 2006 Annual Pacific Basin Conference: Summary Postal Savings in Japan and Mortgage Markets in the U.S. External Imbalances and Adjustment in the Pacific Basin: Conference Summary Central Bank Capital, Financial Strength, and the Bank of Japan Did Quantitative Easing by the Bank of Japan “work”? Interest Rates, Carry Trades, and Exchange Rate Movements The Bretton Woods System: Are We Experiencing a Revival? (symposium summary) A Look at China’s New Exchange Rate Regime Does Europe’s Path to Monetary Union Provide Lessons for East Asia? What if Foreign Governments Diversified their Reserves? A Tale of Two Monetary Policies: Korea and Japan Emerging Markets and Macroeconomic Volatility: Conference Summary To Float or Not to Float? Exchange Rate Regimes and Shocks After the Asian Financial Crisis: Can Rapid Credit Expansion Sustain Growth? Easing Out of the Bank of Japan’s Monetary Easing Policy Reflections on China’s Economy Pacific Basin Notes appears on an occasional basis. It is prepared under the auspices of the Center for Pacific Basin Studies within the FRBSF’s Economic Research Department. 38 Center for Pacific Basin Studies 2007 Annual Report Other Recent Articles and Working Papers By Center Staff Date 2007 2007 Author Michele Cavallo Reuven Glick Paul Bergin Reuven Glick Paul Bergin Reuven Glick Alan Taylor Galina B. Hale Galina B. Hale Galina B. Hale Carlos Arteta Galina B. Hale Joao Santos Galina Hale Carlos Arteta Diego Valderrama Title “Government Consumption Expenditures and the Current Account,” Public Finance and Management 7(1), 2007 “A Model of Endogenous Nontradability and Its Implications for the Current Account,” Review of International Economics 15(5), November, pp. 916-931 “Tradability, Productivity, and International Economic Integration,” Journal of International Economics 73(1), September, pp. 128-151 “Collateral Damage: Trade Disruption and the Economic Impact of War,” forthcoming in Review of Economics and Statistics “Bonds or Loans? The Effect of Macroeconomic Fundamentals,” The Economic Journal 117(516) January, pp. 196-215 “Sound Policies for Emerging Markets’ Financial Stability,” International Finance 10(1), Spring 2007, 101-114 “Sovereign Debt Crises and Credit to the Private Sector,” Journal of International Economics 74(1), January, pp. 53-69 “The Decision to First Enter the Public Bond Market: The Role of Firm Reputation, Funding Choices, and Bank Relationships,” forthcoming in Journal of Banking and Finance “Currency Crises and Foreign Credit in Emerging Markets: Credit Crunch or Demand Effect?” FRBSF Working Paper, 2007-02 “Statistical Nonlinearities in the Business Cycle: A Challenge for the Canonical RBC Model,” Journal of Economic Dynamics and Control 31(9), September, pp. 2,957-2,983 “The Composition of Capital Inflows when Emerging Market Firms Face Financing Constraints,” forthcoming in Journal of Development Economics “Could Capital Gains Smooth a Current Account Rebalancing?” FRBSF Working Paper, 2006-03 “Current Account Adjustment with High Financial Integration: A Scenario Analysis,” FRBSF Economic Review, pp. 31-45 “Measuring Oil-Price Shocks Using Market-Based Information,” FRBSF Working Paper, 2006-28 “Military Expenditure Threats, and Growth,” Journal of International Trade and Economic Development 15(2), June, pp. 129-155 2007 2007 2007 2007 2007 2007 2007 2007 2007 Katherine A. Smith Diego Valderrama Michele Cavallo Cedric Tille Michele Cavallo Cedric Tille Michele Cavallo Tao Wu Reuven Glick Joshua Aizenman 2006 2006 2006 2006 Continued on Next Page 39 Center for Pacific Basin Studies 2007 Annual Report Other Recent Articles and Working Papers By Center Staff Date 2006 Author Reuven Glick Paul Bergin Alan Taylor Galina Hale Mark Carlson Galina Hale Joao Santos Mark M. Spiegel Joshua Aizenman Mark M. Spiegel Jess Benhabib Michele Cavallo Michele Cavallo Kate Kisselev Fabrizio Perri Nouriel Roubini Mark M. Spiegel Diego Valderrama Michelle P. Connolly Michele Cavallo Fabio Ghironi Mark M. Spiegel Mark M. Spiegel Kenneth Kletzer Mark M. Spiegel Andrew K. Rose Mark M. Spiegel Nobuyoshi Yamori Mark M. Spiegel Nobuyoshi Yamori Title “Productivity, Tradability, and the Long-Run Puzzle,” Journal of Monetary Economics 53(8), November, pp. 2,041-2,066 “Rating Agencies and Sovereign Debt Rollover,” The B.E. Journal of Macroeconomics 6(2) (Topics), article 10 “Evidence on the Costs and Benefits of Bond IPOs,” FRBSF Working Paper, 2006-42 “Institutional Efficiency, Monitoring Costs, and the Investment Share of FDI,” Review of International Economics 14(4), September, pp. 683-697 “Human Capital and Technology Diffusion,” Handbook of Economic Growth, eds. Philippe Aghion and Steven Durlauf. Amsterdam: North Holland, Chap. 13, pp. 935-966 “Government Employment Expenditure and the Effects of Fiscal Policy Shocks,” FRBSF Working Paper 2005-16 “Exchange Rate Overshooting and the Costs of Floating,” FRBSF Working Paper 2005-07 2006 2006 2006 2006 2005 2005 2005 2005 2004 “Solvency Runs, Sunspot Runs, and International Bailouts,”Journal of International Economics, January, pp. 203-219 “Implications of Intellectual Property Rights for Dynamic Gains from Trade,” American Economic Review Papers and Proceeding , May, pp. 318-322 “Net Foreign Assets and Exchange Rate Dynamics: The Monetary Model Revisited,” eds. J.O. Hairault and T. Sopraseuth, Exchange Rate Dynamics: A New Open Economy Macroeconomics Perspective, Routledge, pp. 3-54 “Monetary and Financial Integration: Evidence from Portuguese Borrowing Patterns,” FRBSF Working Paper 2004-07 “Sterilization Costs and Exchange Rate Targeting,” Journal of International Money and Finance, 23(6), pp. 897-915 “A Gravity Model of Sovereign Lending: Trade, Default and Credit,” International Monetary Fund Staff Papers, 51, Special Issue, pp. 50-63 “Financial Turbulence and the Japanese Main Bank Relationship,” Journal of Financial Services Research, June, pp. 205-223 “The Impact of Japan’s Financial Stabilization Laws on Japanese Banks: Evidence from Equity Markets,” Journal of the Japanese and International Economies, September, pp. 263-282 2004 2004 2004 2004 2004 Continued on Next Page 40 Center for Pacific Basin Studies 2007 Annual Report Other Recent Articles and Working Papers By Center Staff Date 2004 2004 Author Diego Valderrama Michelle Connolly Diego Valderrama Michelle Connolly Title “North-South Technological Diffusion and Dynamic Gains from Trade,” FRBSF Working Paper 2004-24 “Implications of Intellectual Property Rights for Dynamic Gains from Trade,” FRBSF Working Paper 2004-23 41 Center for Pacific Basin Studies 2007 Annual Report Participation in the Center’s Programs Background Since 1974, the Federal Reserve Bank of San Francisco has conducted an active Pacific Basin program to promote cooperation among central banks in the region and enhance public understanding of major Pacific Basin economic policy issues. The Bank has sponsored international conferences and published books and articles on Pacific Basin issues. The Bank’s Center for Pacific Basin Monetary and Economic Studies, established in 1990, opened the program to the participation of other institutions and individuals who wish to join in promoting greater understanding of major Pacific Basin monetary and economic policy issues. their own funding. Institutions in the United States and other Pacific Basin countries that share the Bank’s interest in promoting Pacific Basin studies are invited to sponsor and fund Visiting Scholars. The sponsoring institution can either nominate a Visiting Scholar subject to the Center’s approval or leave the nomination to the Center subject to the sponsoring institution’s approval. University faculty members on sabbatical leave will find the Center a particularly attractive place to undertake their studies. Center Associates Any researcher who is interested in the Center’s activities may become a Center Associate. Benefits of membership include opportunities to present research findings at the Center’s seminars, and receive its publications. There are no membership fees. Participation Two types of participation in the Center’s activities are possible: Visiting Scholars Visiting Scholars are invited to conduct research at the Center on Pacific Basin monetary, financial, and economic policy issues of interest to the United States and other nations in the region. The Center is prepared to receive up to three Visiting Scholars at a time. In principle, the terms of Visiting Scholars are for six months; in special cases, shorter or longer terms can be considered. To qualify, a Visiting Scholar must have an established research record in terms of publications in professional economic journals and the ability to interact in English with other researchers. Besides an opportunity to conduct full-time research on Pacific Basin subjects, a particular attraction to scholars is an environment that provides active and mutually supportive interactions with other scholars with similar interests as well as access to the expertise of the Bank’s research staff in a wide range of subject areas, such as monetary policy, macroeconomics, international economics, economic development, and banking and financial markets. In addition, scholars have access to renowned economics and finance faculty members in the universities and research institutes located in the San Francisco Bay Area. Visiting Scholars also benefit from the Center’s research support facilities, including research assistants, computers, the Bank’s databases, and its Research Library’s reference services and Pacific Basin collection. The Center provides research support facilities, but typically relies on visiting scholars to come with Activities Seminars. Each Visiting Scholar is expected to present a seminar on a subject of his or her own past research on Pacific Basin issues and to outline a proposed research project to be conducted while in residence at the Center. Center Associates and the Bank’s research staff also present their research in seminars. Publications. Preliminary research results by Visiting Scholars and the Bank’s research staff are distributed as Pacific Basin Center Working Papers to Center Associates free of charge. Conferences. The Center organizes and hosts conferences on major Pacific Basin economic policy issues at two- or three-year intervals, to which central banks, research institutes, and international organizations interested in the region are invited. Conference papers are published in book form by commercial publishers for worldwide distribution. In addition, the Center also sponsors occasional conferences, often jointly with other institutions. Inquiries Contact: Mark M. Spiegel, Vice President International Research and Director Center for Pacific Basin Studies Federal Reserve Bank of San Francisco 101 Market Street, MS 1130 San Francisco, CA 94105-1579 Telephone: (415) 974-3241 • Telex: 4979495 FRBUI Fax: (415) 974-2168 • E-Mail: mark.spiegel@sf.frb.org Web: www.frbsf.org/economics/pbc/ 42 Federal Reserve Bank of San Francisco