Nombre de la presentación en cuerpo 17 On Decoupling and the China Connection * Jorge Carrera Head of Economic Research Central Bank of Argentina IDB, Washington DC May 2008 *The views expressed here are my own and do not necessarily reflect the official position of the Central Bank of Argentina.

Nombre de la presentación en cuerpo 17 1.Decoupling Game - Possible Outcomes 2.Key players  US  China  What's the role for Europe? 3.Fields for playing the game  Commodities prices  Reserves accumulation 4.Summing up: Results of the decoupling game 5.Decoupling in Argentina Agenda

Nombre de la presentación en cuerpo 17 Real GDP Growth (demeaned)

Nombre de la presentación en cuerpo 17 US financial sub prime crisis Key Players 2.1 US

Nombre de la presentación en cuerpo 17 US – Policy Reaction I Key Players 2.1 US

Nombre de la presentación en cuerpo 17 US – Policy Reaction II Key Players 2.1 US

Nombre de la presentación en cuerpo 17 US Spillovers - trade channel Key Players 2.1 US

Nombre de la presentación en cuerpo 17 US Spillovers - financial channel Key Players 2.1 US decreasing real interest rates, flight to quality (to treasury bonds in dollars

Nombre de la presentación en cuerpo 17 How much China depends on US? How much EMEs depends on China and US? Key Players 2.2 China

Nombre de la presentación en cuerpo 17 Could China grow inwards? Key Players 2.2 China

Nombre de la presentación en cuerpo 17 New leader for OECD growth? New buyer of last resort? Key Players 2.3 What's the role for Europe?

Nombre de la presentación en cuerpo 17 New leader for reserve currency? Key Players 2.3 What's the role for Europe?

Nombre de la presentación en cuerpo 17 Commodity Price Index in Real Terms, Fields for playing 3.1 Commodity boom

Nombre de la presentación en cuerpo 17 Long Run Determinants of Commodity Prices, Note: Standards Errors in brackets Fields for playing 3.1 Commodity boom

Nombre de la presentación en cuerpo 17 Commodity Price Missalignment, Fields for playing 3.1 Commodity boom

Nombre de la presentación en cuerpo 17 Fields for playing 3.2 Reserves accumulation Reserves accumulation (and BW II)  Precautionary view: emerging countries have been preparing for this type of crisis  Exchange rate view: Are BWII at risk? Implicit coordination rules of the game requires dollar stability and US deficits (buyer of last resort). Passive attitude in the exchange rate markets

Nombre de la presentación en cuerpo 17 Reserves and Sovereign Wealth Funds (millions of dollars) SWF: 2 trillons? SWF: 3 trillons? Fields for playing 3.2 Reserves accumulation

Nombre de la presentación en cuerpo 17

Sterilization policy of systematic accumulators Fields for playing 3.2 Reserves accumulation

Nombre de la presentación en cuerpo Summing up Coordination is a key determinant for a successful decoupling A successful decoupling is the more probable scenario the more effective the Fed will be in shortening the crisis in the US

Nombre de la presentación en cuerpo Summing up Crisis duration A long crisis in US (Japanese style?) implies weak dollar and strong American exports? Real GDP Growth (demeaned)

Nombre de la presentación en cuerpo Summing up Crisis duration  Who will absorb additional US exports?  Who will absorb the excess EMEs exports to US?  Are China, Japan, Europe and Middle East prepared to do that? Another unpleasant arithmetic.  We need a new buyer of last resort that take suddenly the role of US has had in the last decades.  The risks are massive competitive devaluation (or reluctance to appreciate) and trade restrictions

Nombre de la presentación en cuerpo Summing up

Nombre de la presentación en cuerpo Summing up  Decoupling is not at all a result of passive policy.  Leader Countries should be active and coordinate among them  Central Banks have revealed that they have more than one objectives with variables weights: Price Stability Output Stability Financial Stability

Nombre de la presentación en cuerpo Summing up Decoupling and after  If US recession is small, it will be the best scenario…  …but if inflation increases we will see: an abrupt increases in US policy interest rate (Mishkin) dollar RER appreciation contraction in liquidity  All these imply lower real commodity prices

Nombre de la presentación en cuerpo 17 Decoupling and after  If US recession is Xlarge we will see: negative real interest rates for a long time higher fiscal deficits dollar RER depreciation expansion in liquidity high pressures in US financial market as financial center 4. Summing up

Nombre de la presentación en cuerpo Decoupling in Argentina Argentina has a high diversified trade by destination

Nombre de la presentación en cuerpo Decoupling in Argentina Argentina has a high diversified trade by sector

Nombre de la presentación en cuerpo 17 A simple estimation on the impact on the Argentine economy of a decrease in exports to China and US US2007 Exports/GDP25% Exports to US/Total Exports6,2% Exports to US/GDP1,6% US Total import decrease (pp)-10% Relocation50% Impact on Arg growth-0,16% Impact on Arg growth with relocation of 50%-0,08% China2007 Exports/GDP25% Exports to China/Total Exports7,9% Exports to China/GDP2,6% China Total import increase (pp)10% Relocation50% Impact on arg growth0,26% Impact on arg growth with relocation of 50%0,13% Total Impact on Arg growth0.10% Total Impact on Arg growth with relocation of 50%0.05% 5. Decoupling in Argentina

Nombre de la presentación en cuerpo Decoupling in Argentina

Nombre de la presentación en cuerpo Decoupling in Argentina

Nombre de la presentación en cuerpo 17 Thanks!