June 2010

Presentation at the Global Interdependence Center’s (GIC, Philadelphia) Conference in Prague  at the Czech National Bank on June 14, 2010

Introduction

China, the U.S. and Europe (European Union, EU) are the economic powerhouses of the world. Much is regularly written about the relations between the U.S. and China, focusing both on political and on economic ties between the two countries. Relations between EU and China are discussed less frequently in the daily and weekly media. 

There are several reasons for this emphasis on the relations between the U.S. and China. First, the U.S. and China are two powerful independent countries with their own decision-making.  Second, Congress appears to hold more openly discussed views on China than officials within EU. Third, U.S. officials have in the past years expressed their irritation about China’s undervaluation of the renminbi much more clearly and frequently than leading representatives of the EU have done. In particular the currency issue has frequently made headlines, partly because of China’s various strong reactions against foreign (American) verbal exchange rate interventions.  

On the other hand, the Chinese see the European Union – we discuss Europe in this context as the EU – as an economic organization rather than a political one.1  This is an important distinction to keep in mind. Furthermore, the EU is regarded as a very complex organization, quite hard to deal with. The Chinese hardly understand why national interests dominate EU meetings in these very difficult times. In Asia there is instead a desire for more harmony in the region when international problems are on the rise, but also more respect for the largest economy (i.e. China) – contrary to what Germany is currently experiencing.

Limited tensions between China and the EU are usually caused by (smaller) trade frictions, sometimes also by varying interpretations of free trade and environmental improvements. But more interesting issues regarding China and the EU show up currently and will continue to do so in the (forthcoming) aftermath of the global and European crisis. This may concern both microeconomic and macroeconomic developments.

China manifests itself as a country that increasingly has to be watched by means of interdisciplinary research. Politics, sociology, the environment and even psychology should be included in a future economic analysis. Pure macroeconomic analysis cannot capture China’s economic future.

This should be said despite the methodological difficulties that exist in interdisciplinary economic modeling. The current economic crises in some EU countries tell us, for example, that reasonable forecasts on European growth and financial markets for at least some years ahead cannot be made without including the political ability of reducing large fiscal deficits. And getting back to China: What will the new Chinese political leadership go for when it comes into power only a few years from now? China’s economy is – as we well know – very closely linked to the political leadership of the country.

I also look at future corporate relations between China and Europe. 

Read the complete paper

Sammanfattning:                                                                                                                                                                                                                                                        Alan Blinder – professor vid Princeton och f d vice ordförande i Fed – undersöker I denna utmärkta artikel, i vad man andra centralbanksuppgifter än de traditionella såsom räntesättningen med fördel kan bli kopplade till landets penningpolitiska institution, centralbanken (ett ämne som för närvarande tas upp i många akademiska konferenser och centralbanksseminarier). Han ser dylika möjligheter, till exempel vid uppkomsten av potentiella finansiella bubblor – men inte avseende aktiebubblor utan i samband med s k kreditbubblor. Blinder förordar också att icke nödvändiga centralbanksuppgifter ”utlokaliseras” till andra institutioner.

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Alan Blinder was a prominent professor at Princeton before he became the vice chairman of the Federal Reserve Board. After having left the Fed, he returned to academia and Princeton. Blinder is an influential monetary policy researcher. His work should be read by economists and others who want to discuss more than the next policy step by the central bank.

In his article “How Central Should the Central Bank Be?”, Blinder leans heavily on the economics of scope. He concludes that “the central bank should monitor and regulate systemic risk because preserving financial stability is (a) closely aligned with the standard objectives of monetary policy and (b) likely to require lender of last resort powers…” I think that Blinder is right about the first point, about monitoring systemic risk. Regulating systemic risks, however, should not necessarily belong to central bank commitments. There are both pros and cons.

Blinder pays special attention to the question whether “asset-price bubbles should be an integrated part of monetary policy. Or should the Fed eschew second-guessing market valuations content itself with “mopping up” after bubbles burst (what Blinder calls the Greenspan/Bernanke approach)? Blinder offers a reasonable distinction between credit-fueled bubbles and equity-type bubbles. He argues that the “mop approach” still should be applicable to equity bubbles not fueled by credits. However, the central bank should “try to limit credit-based bubbles”. I do share Blinders opinion on this issue by 100 percent. More central bankers begin to share this view as well.

I feel happy about these pragmatic changes in the real and academic world – an approach that I have been pleading for during a whole decade. Only a few years ago, the Swedish financial newspaper Dagens Industri interviewed a number of economists about their view on monetary policy and asset prices. If I remember correctly, I was the only one who supported this nexus.

Our modern global economy calls for a much broader and better macrofinancial analys and integration of central banks’ objectives and commitments. I am waiting for the next interesting publication of Alan Blinder.

I denna blogg vill jag presentera mitt paper från SNEE- konferensen i Mölle 18-20 maj, 2010.

Abstract
Transparency in Chinese financial markets is still poor. Lagging transparency has been cited as one of the main reasons for the current global financial and economic crisis. G20 countries – China included – have committed themselves in a communiqué from the London Summit of 2009 to work harder for increased transparency in financial markets.

Thus, Chinese has an important global commitment: the improvement of transparency in its financial markets. This issue will become increasingly important if the Chinese economic powerhouse continues to gradually open its capital account, pursue its long‐term work for a
convertible currency and develop a global financial center in Shanghai.
Markedly increased financial transparency should not only give major microeconomic benefits to domestic and foreign shareholders, but also macroeconomic gains to China itself, to Europe and the whole global economy – even if modeling based on these correlations still appears to be impossible. Joining the process of more transparency will make the need for specific financial reforms more visible ‐ and more intensively discussed! This could accelerate the necessary structural changes in Chinese monetary policy and on financial markets.
Growing risks may be observed earlier than in the current opaque system. Avoiding bursting bubbles and bank crises may mean a very positive contribution to GDP growth – though in an inverted way.

China is already the number one exporter in the world. Soon it will become the second largest economy in the world in traditional GDP terms. These developments clearly call for a major upgrading and modernization of China’s financial markets – not least because of the
fact that many developments in China will have an increasing impact on global financial markets, European markets included. How should such a development be achieved without acceptable or good financial transparency?

There should not be an alternative to good transparency in Chinese financial markets – for both domestic and global reasons. Such a change would be positive for Europe as well.

Om du vill läsa hela mitt paper, klicka här.