 So I'm sorry to interrupt all the great conversations, but that's why we have the entire afternoon at your disposal So we'd like to kick off now with the chair The discussion on macroeconomic and monetary challenges, which is chaired by Peter We will have a discussion concluded with a Q&A session and specifically on this one We'll be asking you to vote via iPad and I know that Peter is really relying on your views and on you to vote So if you have not got an iPad make sure to tell us we'll get you one and Go to the polling section whenever we have the questions coming up and with that a handover to you Peter. Thank you. Thank you Okay, so I have about eight questions here I will ask only three depending on how the debate goes So I count on you to to click on your iPad and and the results will will will come immediately on the screen Very quickly. So so let's let's try this this technology the the purpose of the the panel is macro and monetary challenges You remember Mario Mario was stressing the need to have shared shared diagnosis on the root causes of the problems We have so we'll see a little bit in the presentations here We can agree on diagnosis and the other point of course is also what do you do about this? What sort of collective action do you need what sort of institutional changes would you like to see so which? We will refer to the discussions of this morning, of course thinking about that So I thought the best would be to start with Mori We have a sort of ten minutes presentation followed by and and only Just after so you have ten minutes ten minutes ten minutes Then they have a chance to react relatively briefly because we want this session to be extremely interactive So and and brief intervention quick interventions So Mori you start and you have a you have a slide a few slides to present Thank you very much Peter and thanks for the invitation to this wonderful conference Let me start out by issuing my disclaimer. These are my views alone and not those of the IMF's management Executive board or other members of its of its staff. I want to start out with the Picture that Peter Olivier put up This was not a coordinated policy, but just happened Including 2016 projections on global imbalances Looking at this history. It's very obvious that we see a build-up leading up to the crisis a sharp contraction and Now in the very recent years we see again an expansion of these imbalances There is some change in position with oil exporters on net becoming importers They're also expanding what might we might think of as excess imbalances as we measure it at the fund certainly China Japan Some countries in the eurozone Germany in the Netherlands moving into large surplus the US moving into a large deficit Larger than what our models would indicate are warranted and One question one could ask and I want to use this question to lead into a broader discussion of monetary issues is What will be the exchange rate adjustment that this? Development leads to now One of the Difficult facts for international macroeconomists is if you just look at the raw data on current accounts and exchange rates It's very hard to tease out anything looking like what we think the textbooks imply I show you a number of countries here and probably the best case you you can make is for China But of course China has not had a floating exchange rate And it's not subject to the same asset market shocks as these other other countries The problem has been put in the press and a number of FT articles in fact in the in the fall as Covenant accounts and exchange rates are not linked anymore And I think that's the wrong conclusion to draw from these sorts of pictures You know the fund we believe that they are that the demand curve for a country's products still slopes downward but there are many many other shocks and That work I won't go into detail on this, but you know if you look at the slides later, you will see some examples one of the problems is that you know, we live in a world of very complex asset markets with gross flows in either direction out of countries in countries and Shifts in portfolio demands will have exchange rate effects, which may have no proximate or even Medium-term obvious relationship to the current account Asset flows are Increasingly important this doesn't mean that there isn't a sensible adjustment mechanism underway But of course asset flows can long impede current account adjustment if we look at the US experience In the 2000s the US moved to historically large current account deficits there was a debate over whether those were sustainable or not and Partly that debate missed the fact that these deficits were the result of financial market developments Which should have been quite worrisome in themselves? Probably the deficit was sustainable, but not the underlying factors One thing we can say for exchange rates, and I do want to make this point rather strongly is that despite the importance of portfolio shifts in Determining them there are some regularities What I try to illustrate in this chart is the fact that exchange rates actually result Adjust in the way you would think to output surprises with countries having negative output surprises also suffering depreciations The left-hand side of this chart shows World economic outlook output growth forecast revisions between the April and October editions Annually since 2011 together with the exchange rate response for on the left floating rate countries and on the right more or less fixed rate countries and Exchange rates really do seem to perform this buffering function to which President Draghi adjusted Referred this morning. In fact, if we look at the UK now Certainly part of what is going on is a result of the exchange rates adjustment to growth expectations Many other things are going on as well But if we imagine what the UK would look like this week we're attempting to defend a fixed exchange rate We can see the value of floating rates Let me come back to this issue of gross Flows because I think it's become a very important one not just for thinking about global financial stability But thinking about monetary policy The net current account Disguises massive two-way flows This was also a theme very much present in the paper by Pierre Olivier and Ellen this morning and these data are well known to you Another way of looking at this is to consult the stock data such as the Lane and Melesi for ready data and We see well-known patterns For advanced economies particularly an explosion in gross external assets and liabilities relative to GDP Increases albeit less dramatic for the emerging for the emerging markets and It's here that We really worry about the financial stability risks that is here in these gross positions that the financial stability risks Reside not so much in the net level of the current account when We look at the UK today and observe that it has a very large current account deficit I think one could one could much better worry about the the absolute magnitudes on the asset and the liability side of its Very very large balance sheet What does this have to do with monetary policy well if we look at current monetary policy debates There's a similar Dicotomy between what we learn from gross and net asset flows, although it's not usually posed in this way You saw basically this diagram Earlier, I think Pierre Olivier showed nominal Long-term interest rates. These are the real long-term interest rates, but they illustrate the fact that over the Recent years in fact the years since the Volcker disinflation in the US. These rates have been falling Precipitously now they're historic lows and Data show an analysis suggests that the natural real rate Maybe at a very low level persistently which is a factor behind the monetary policy stances being followed in a number of countries Potential explanations. We've talked about some today. I can add a few the global saving glut monetary policies themselves Uncertainty the world is much more uncertain than before the global financial crisis in multiple dimensions Safe assets shortage demographics low expectations of technological progress and one could one could go on So this is one story about monetary policy, but there's another story out there Which is that? Monetary policy is driven by liquidity surges particularly dollar liquidity and It's buttressed by the notion that A lot of lending in the world is dollar lending even outside of the US The next slide is one illustration of this, but one can illustrate this In other ways Some work out of the BIS. I think puts it in a very stark way. It says don't worry about The Wixeli a natural weight, but worry about financing conditions And I wonder what do we mean by financing conditions if not the gross flows of assets that support economic activity the policy conclusions that follow from the the second view the the Financing view of economic activity are unclear From the BIS point of view for example, it means don't do so much on the monetary side You may be feeding bubbles you may be feeding misallocation of resources When I put these two views side by side, I feel that they're not really contradictory but Complementary and at some level the work that Tobin did years ago in building portfolio balance onto macro models Key to understanding how these pieces fit together. I don't think it's macro economists. We've really come up with a modern reconciliation a lot Tobin, but I think it's a it's a it's a a task worth taking and You know just thinking about some very simple experiments I think reveals the Possibilities here So, you know what Tobin set out to do was to reconcile stocks and flows You know stock equilibrium and asset markets flow equilibrium In a framework where asset stocks always equal asset demands and in the kind of models he looked at Stock equilibrium would influence the flow equilibrium the flow that determined how wealth capital Evolved over time But also factors that affected the flow equilibrium would influence the stock equilibrium. There would be two-way feedback and One way to think about this is to Look at a very simple example So suppose globally we have an increase in the demand for safe assets now. This could be Due to higher uncertainty higher risk aversion, you know, you name it But in a Tobin type of model what would this do? Well Tobin's Q would fall The risk-free rate of interest would fall Investment would fall Capital would fall over time This would by the way affect economic growth adversely the marginal product of capital would rise and The risk-free rate would partially recover but not completely and This is a world that Maybe not in every detail, but in broad outline doesn't look that different from from where we are in the sense that the risk-free rate Is that historic lows? However, if you look at Measures of the return to capital For example, what Bob Hall likes to talk about as the capital wedge Which is the you know the earnings on capital less the risk-free rate? These are high they've risen and people say why is it that with that wedge so high People aren't investing. Well, it's because there's been a portfolio shift away from capital a riskier world Greater demand for for risk-free assets, so I think this kind of approach is one that has has a lot going for it now I'm actually out of time here and So I'm not going to go through the last slide But I think this this sort of world does indicate a policy agenda one that does address aggregate demand But also financial stability concerns In particular coming from the IMF. It's natural Worry a lot about the global financial safety net capital flows things like that. I guess And may be talking more about that, but I will just leave you with with one thought about the global financial safety net It's very much related to the risk-sharing considerations that Ellen and Pierre Olivier were talking about and To build it to make it more comprehensive actually requires more fiscal risk-sharing not just as is being discussed in Europe but at the global level and If we're going to talk about the GFS and then we really have to talk about those issues seriously I'll stop there. I'm tempted to to ask You the question to ask you the first question on polls so prepare your iPad So the question So we take a question 5 in my list No, you have it normally, so you have to look at all And that's the question Normally takes you 10 seconds If you can enter There Is Thank you Pleasure of course to be here and I want to thank the organizers for the invitation Enjoyed both papers, but I thought I would direct my remarks much more to Barry's than to Pierre Olivier's in part because it's closer to what I've been thinking about and in part because I think it may be something to be added First off it seems to me that the International Monetary Order which is the title of his paper needs two things One it needs individual countries to have some kind of in monetary sanity themselves and two then there need to be Some kind of international Arrangements that make that all fit together So far at least I think we don't have the second but we've had something at least of the first In order to get the second you need to have I think of the analogy I suppose between a bunch of people on a cruise and a bunch of people in the psychiatric ward on the first I would expect there to be reasonable order in the second I would not if they're on the psychiatric ward It's for a reason they're all insane and of course you're not going to get any coherence between them anyway And to some extent the the international system has characteristics of that in both dimensions The many countries are going back in history a bit, but until let's say about 1980 and you can choose your date I think the true state of the world was one in which Europe the United States Japan and a few other countries Australia New Zealand and so on were more or less the same Passengers on a ship and they provided more or less stability to the rest of the world with the IMF coming in And I'll come back to that in a second Starting sometime later on maybe about the 1990s We've had some of the people coming in to the ship and so it's become much more a world economy with fewer insane Passengers or the same passengers left on the ship and more an orderly a procession But with that there's been some learning and I think that's important too I think it's our well first off until the 1990s most capital flows were official There was very little private capital flow and many of the things we're discussing now are things that have arisen in a large part Not entirely the driven dilemma was there and all that but from the 1990s on the role of private capital has been more important And that has had major consequences Now I turn then to the point of the discussion which of course is the role of the International Monetary Fund I think the IMF was pretty was it is pretty good and handling individual countries when they're moderately insane Moderately or more insane in the sense that They can diagnose fairly well that You're going to go insane But on the other hand until insanity actually happens with consequences. There's not a lot they can do They could diagnose it. They could put the diagnosis forward But nothing happens until indeed The inmates start fighting each other or something similar with that analogy Obviously the IMF's Core competence it seems to me lies in Diagnosing the macroeconomic conditions and other things and being able to perform some kind of reasonable judgments as to what's necessary To at least to some degree restore sanity But it has some degree of power to do that only in cases in which in addition to having some degree of Sanity there is some kind of power behind it IE the need for money which happens when you've been insane long enough and spending beyond your means and otherwise doing that Until the 1990s the IMF handled the crises individually Even in the 1990s, of course the mentor was it been no developed country that it had a crisis since the 1970s Or I guess early 1980s something like that. It was all a problem of it emerging markets developing countries and so on And one of the problems the main problem in fact was getting the individual country to take more ownership of the needed reforms The IMF was saying you've got to cut expenditures Etc. Etc. Which over the longer term was necessary and I come back to this because Given that that's when the IMF came in there was a stigma to IMF progress because nobody likes to cut back The stigma came from that and not from other things So how you get rid of that stigma? I have no idea because a dean countries have had IMF programs only when there's been trouble Getting around that is an issue Sovereign debt was there But basically the Paris Club was handling official sovereign debt and again It did not become an issue until the 1990s and of course at first even as private debt Accumulated it accumulated mostly in the most credit worthy countries for the most part And secondly it took a while to build up to the point where there were international problems with it So it has become more of a problem for the individual countries since We now of course have sovereign debt in other countries and not only from the public sector But the corporate exposure as was discussed internationally and the IMF is not well equipped to handle that at the present time accepted the sense that for individual countries Because the IMF score competence lies with the macro and with the ability to sort of say If you raise this text here's a rough approximation as to what will happen for the most part the private markets were More or less willing private creditors were more or less willing to accept the IMF Forecast as a basis on which restructuring rescheduling could occur But only in that sense could it do it? But that was an important sense and that to some extent has become less important for a variety of reasons So with that we have the sovereign debt issue I think as a major outstanding issue in handling Individual country crises for relatively small countries Greece and its public sector debt Is I think a good case in point of what the problems are I think most people observers would agree The debt was it is unsustainable The private debt has been reasonably wiped out and that leaves mostly Greek public debt And it will be very interesting to see how that is handled But it should also I think be something of an object lesson going forward There's another interesting case which is not international per se, but which will show some interesting things And that is the case of Puerto Rico, which is a commonwealth of the United States But not a state and at the moment there is no bankruptcy law whatsoever applicable to Puerto Rico debt The July 1st actually is the first big payment Brexit may take its mind off it for the time everybody's mind of it for the time being But as that wins its way through whatever the processes are Unless there's something passed by the US Congress this week We will see what happens in the absence of a mechanism there to handle another Very unsustainable situation Okay, going to the global part I agree we need to have a common understanding the problem and I agree we could have a better one without any doubt But having an understanding of the problem as Keynes understood and as I think the IMF has understood for some years Is not the end of the problem because we had I think a common understanding or something close enough to it to matter during the First decade of the century when indeed global imbalances were widely recognized And where China was largely on the surplus side and the United States was largely on the deficit side and To its credit the IMF naively went ahead before the G20 and just sort of said okay We're going to get the creditors and debtors together in the room and we'll have a discussion We'll agree on the problem and then we can agree on how it's out And the debtors came into the room quite and creditors quite happily and when they came into the room quite happily They very quickly agreed the yes the problem was global imbalances and yes China had the surplus and yes the US and a couple of others had the Deficit, I'm generalizing but this is basically the truth Everybody agreed on that and of course just as the scarce currency clause was forecast to do under Cades The Chinese said the American it was an American problem. They should solve it The Americans said it was a Chinese problem and they should solve it. Everybody agreed on the diagnosis It was only who should take the action that was the difficult issue and I Respectfully submit the to this day that is still the case. We are not that bad at diagnosing the problem Maybe we get more symptoms and causes sometimes maybe that's an issue But I do think that in terms of who should do what the issue would still be out there And I do not know how in a world of sovereign states you really get to resolve that one There proposals it seems to me to get more authority internationally are finding good It's clear that that would be in a sense one way to solve it But if I think about something as extreme and I agree with Barry here is the world central bank My question is if in domestic economies such as the United States the United Kingdom ECB or whatever If in those economies we have fights over fiscal and monetary policy and how tight it should be in their criticisms And so in politically as there are What on earth would happen if we had countries on either side of that ledger and we had an international central bank and who To whom would they be accountable in any sense for whatever happened after that? At least I cannot think that through to the point of even imagining it at this stage Maybe it has to happen, but I don't know how and I don't know even how you get there on fiscal policy What I do think is that we have had stages of learning along the way in the 1990s I think the role of emerging markets was not understood I think that became for the major emerging markets much better understood in the past decade or so I think we still have a lot to go obviously the European difficulties are raising new questions and some of the paper some of the discussion here clearly focuses on that But I think learning will continue and I have more hope for that for individual countries and getting more sane Passengers on the ship than I do for the ship as a whole Sort of somehow agreeing between the same and the insane how to get there. Thank you Let me ask let me ask a second question now for the poll you will see it on the screen So the time that financial safety net is Please choose one option the alternatives are a Adequate be large enough, but underutilized see to a small The misspecified and thus incapable of tackling crisis effectively, please Choose your option and push the submit button Ten more seconds. Thank you 58 okay, that will fit into our discussions after but Okay Shanyin you have the floor can we can we see now the presentation of Shanyin? Thank you Peter. Thank you organizers of the ECB Forum for inviting me to the panel. I'm going to tilt my initial remarks Towards emerging market perspective. I'm gonna start with this chart, you know There was a time when when we talk about global growth, you know focusing on advanced countries will be enough All the leading contributors to global growth essentially advanced countries by the sheer size of those economies Since the beginning of this century China has become the largest single country contributor to global growth surpassing us passing Europe as a group and so on and since 2008 India has become the second largest single country contributor to GDP growth countries contribution to GDP growth is a product of countries real growth in real domestic currency times the share of GDP country economies the GDP in global GDP the share Using IMF methodology uses a PPP adjustment if one does not use the PPP adjustment Then the relative position of India and US would Flip so today US will still be the second largest contributor and India will be behind but China will still be The largest single country contributor. So the world has changed enough that when we talk about We want to worry about future global growth. It doesn't make sense to keep basic mind and think about growth for emerging markets, especially The leading words so a closer look at China are people's Republic of China growth rate is Moderating there's a tremendous discussion both outside the country and inside country about the underlying causes and therefore the right the policy response to to this growth moderation in my view the moderation comes from a combination of structural factors and transitive factors and the most important structural factors are the following three one is shrinking workforce since 2011 the absolute size of China's workforce measure by you know Has been shrinking roughly at the rate of a point three percent a year So fewer people are working now than before and even fewer people will be working next year than in this year and that Is a very important structural factor? Second factor is perhaps better understood gazillions of across country growth regression supports the idea that is the country's real wage rises Growth of a pocket GDP should come Come down, you know in Asia where I'm working at the moment There were a group of country that used to be called four little dragons The label were meant to be complimentary was a it was a tribute to Superfast growth rate of those four economies and they were known as a dragon economies But today these economies are four little worms in terms of their growth speed and that's not particularly surprising because they have reached the level of their high-income counterparts and they therefore Can't expect it to be grow much faster than high-income countries that they Grow three come start China's not quite at their level of income yet somewhere in between but Same logic applies and that's the second reason for growth rate to comes now second is that this changing Growth model that we see maybe I have a when I'm talking make sure this slide that both on the demand side You see a very rapid increase in Consumption as a share of GDP and on the supply side a very rapid increase in in the share of service in GDP Was corresponding to kind of share industry is going on Some of those structural transformation big part of it of course is just a natural response to rising wages But but but not all of it Nowadays we go to a coastal cities increasingly you're going to meet local leaders They will say they will tell you that they are they don't they no longer welcome any kind of investment Any kind of investment coming to their cities. They are looking for more, you know, low pollution intensive You know, they don't want to see another chemical factory. They want to see more human captive intensive and More environmentally friendly Kind of a investment. So there's also deliberate Policy choices to to nudge the growth model along and they understand that could come partly at the expense of GDP growth So these are structural factors underlying this especially the first two I think it's perhaps quantitatively most important They are transitory factors weak global economy and in my view Overvalued possibly overvalued You exchange rate and economy has many many challenges, but I'm not going to focus on that. I want to in my remaining Times I want to talk about Three challenges I see especially important for emerging markets. They have potential implications for a choice of choice of monetary policies aging and PPP defacing and potential Transmission or passive transmission of a monetary policy from advanced countries to emerging markets aging Aging used to be considered a high-income country problem and no longer but no longer so today with shrinking workforce you can get a decline in natural rate of Interest in principle optimal monetary policy should be a bit loser In that with lower natural rate of interest optimal monetary policy should be a bit loser than otherwise the case That means that you know a taste standard in quotation mark Taylor rule that does not take into account Those kind of demographic changes May be too tight relative to the optimal rule indeed that this has been invoked as a one possible explanation for the declining declining real interest rates in Japan in the last 20 some years in a paper by Fujita and Fujiwara And I said, you know emerging markets are already experiencing aging problem China is quantitatively biggest example of that And we see the turning point a few years early depending on which particular age cohort you are seeing clearly the working workforce is shrinking cost Chinese case is partly driven by The family planning policy very strict family planning policy putting to place in early 1980s Which for a while temporarily produced a abnormally favorable dependence ratio contributing to China's very fast growth rate But in the last few years the situation has flipped China has entered a phase of abnormally unfavorable demographic force, but China is not alone in fact many other emerging economies You tend to have similar patterns. So on this graph I tabulated fraction of people are living in different types of demographic features and Deep blue is is Economies with declining workforce and where this economy was a stagnant Population and if the the sum of these two has increased steadily and his forecast to increase even more to close to half of the world by 20 so it's a major Feature of the world will we are we are seeing the second challenge is PPI Deficient so normally we don't worry about PPI defacing or my observation that we don't worry about PPI infacing separately from CPI Infrashing they go together both tend to be infacing up at the same time or both tend to be in deficient at the same time but we are not Living in their normal world anymore And we tend to see divergence of a tool when the tool diverge There's some reason to think that the monetary policy should in principle pay attention to both PPI changes and CPI changes. We know when you have sticky prices in both sectors PPI also plays an allocative role ignoring a PPI could cause could cause Monetary policy to be too tight Second reason for monetary policy to deviate from optimal. So here are some chart illustrates that this This new phenomenon that PPI CPI tend to diverge and diverging many many countries looking at PBOC's vice governor Zhang Tao he was in PRC. There's a lot of discussion about that the PPI China had had many many quarters of a negative PPI Why CPI still model if you party it turns out to be a very very widespread Phenomenon, so I here just listed a few relatively large economies in Asia where you see in majority of those cases you have small part of CPI infusion by the same time you tend to see negative PPI changes so PPI deficient has become very very widespread. I'm skipping a chart that over time you see those Country economies experiencing PPI have increased quite quite a bit now roughly a third of the economies in the world I would have negative PPI And the third challenge is the first two may be somewhat new The last one is not new but requires perhaps some new understanding, which is where the emerging market economies suffer from Innocent bystanders problem when monetary policies of the rich world Change cost monetary policies of rich world set according to their own Needs such as the need to deal with Brexit as a price bubbles financial crisis and so on But the question policymakers of the emerging market Strug have to struggle with is whether they Have to involuntary import policies which May or may not be desirable on this. This is something that we discussed multiple times today Already this continue to be people arguing that flexible exchange religion has a strong role to play in Conveying monetary policy autonomy, but we already heard multiple times as a discussion about trial and error was a dilemma that the idea that Found various angle. I cited the three papers they found various angles there that perhaps a flexible exchange rate isn't Good enough indeed in some ongoing work that I do with adb colleague that We skip to to this Second to the last slide and that in the data, you know, when we formally look at country's choice of monetary policy conditional on what It should be doing based on its domestic need and controlling controlling for global financial shocks You see whether the country beyond those two factors Involuntarily imports monetary policy of anchor country in our case of the US in that context we see that My reading of evidence our reading of evidence is that the flexible exchange regime By itself does not confer enough monetary policy autonomy in the sense that you know beyond a country's domestic Need we see additional passive change amount US periphery country emerging market country policy Following US policy, but there's some interesting symmetry and there. So this is a special special reluctance for not following US policy change when US policy change otherwise will lead to appreciation of domestic Currency, so even if you have flexible exchange religion Data suggests the countries don't feel like they can use it In their sense and the data also suggests that some form of capital controls appear necessary to to Offer some autonomy Interestingly, we also see some evidence that some combination of a flexible exchange religion and capital controls perhaps offer the most Most insulation for emerging market monetary policies are something that the way Tentatively label as a 2.5 member that is you see capital controls appears to be necessary At the same time there seems to be some additional value of having greater flexibility of nominal exchange. Let me just summarize that emerging market economy seems to face challenges some new challenges and some old challenges Including the economy workforce and more widespread the producer price deficient and still have to do with involuntary imports of monetary policy that may not be That great for for those economies. Thank you