Sasidaran Gopalan and Ramkishen S. Rajan One of the noteworthy dimensions of India’s increasing integration with the world economy has been the rapid globalization of Indian businesses as they have aggressively acquired assets in a number of other countries, including Singapore. Geographical Distribution of Outward Acquisitions According to official data from the Indian government […]
M. Shahidul Islam and Ramkishen S. Rajan Bank lending is an important but oft-neglected channel via which monetary policy affects the overall economy. A large number of firms depend on commercial banks for funding, particularly small and medium sized enterprises (SMEs). The basic idea behind the bank lending channel is as follows: an expansionary monetary […]
Ramkishen S. Rajan and Kenneth A. Reinert Economic globalization, broadly defined as the reduction of economic distances between nations, has been fostered by three factors. The first is the innovations and advances in transportation, information and communications technologies. The second is a broad global consensus that market-friendly policies are a means of rapid and sustained […]
Following Calvo and Reinhart (2002), it has become commonplace to argue that there is a “fear of floating” among emerging economies in Asia and elsewhere. However, the sustained reserve build-up in emerging Asian economies since 2000 until 2008 (with the onset of the global financial crisis) suggests that they are more sensitive to exchange rate appreciation than depreciation. Indeed, a massive body of work has focused on trying to rationalise the causes and consequences of reserve build-up in emerging Asian economies and elsewhere especially since 1998. Apart from valuation changes due to currency composition of reserve stocks, the three main rationales often suggested for reserve accumulation are insurance (i.e. preventing a crisis), mercantilism (i.e. stimulating growth), and reducing exchange rate volatility. The last rationale (i.e. managing exchange rate volatility), while often used by central bankers, is unconvincing as it should imply that, on average, international reserves do not change much. The fact that reserves are being accumulated on a sustained basis suggests that intervention has involved more that just minimising exchange rate volatility.
A decade ago the international financial community was focused on the financial crises in East Asia, Russia and other emerging economies, just as they are focused now on the US financial crisis and the ongoing global credit crunch. Just as in 1997-98 the initial emphasis was rightly on crisis management and regaining stability (with the IMF playing a central role a decade ago compared to being practically invisible currently) before shifting to crisis prevention. Again, just as now, there were some initial discussions a decade ago on the need for reform of the international financial architecture and the creation of a new Bretton Woods Agreement, with emerging economies like China and India being given more voice. Bold suggestions were also made for an international lender of last resort (ILOLR), a global banking regulator, and the like. However, as the crisis dissipated 2000 onwards, so did any serious discussion on and interest in a fundamental reform of financial architecture.
As the subprime crisis in the US and the UK has now turned into a full-fledged global credit and financial crisis, policymakers worldwide are belatedly attempting to take urgent steps to prevent a global financial meltdown. Actions taken so far have included massive infusion of liquidity into their respective financial systems, blanket guarantees on bank deposits to reduce the likelihood of bank runs and recapitalization of financial institutions, including in some cases, partial bank nationalizations.