Wealthy Nations Daily Update - EM Policymakers

Olivier Blanchard’s latest publication resonates more with emerging market policymakers than standard models; expounding on evidence that capital inflows and currency appreciation can often boost output.

Since retiring as Chief Economist of the International Monetary Fund last month, the esteemed Olivier Blanchard is not expected to fall into obscurity. Now a senior fellow at the Peterson Institute for International Economics (PIIE), an ever more influential Washington think tank, he will now be able, “to sit down and take the time” to focus on honed research which he had, “too little time” to accomplish during his 8 years of firefighting at the IMF, which he joined the month Lehman Brothers went bankrupt.

Whilst at the Fund Mr Blanchard’s most influential papers challenged fiscal multiplier assumptions, raising concerns over demanding government austerities, and helped the IMF rethink its staunch opposition to capital controls. Both have certainly aided recovery in the Eurozone car crash. In his new tenure at PIIE, he has already had three revised co-authored papers published. One paper, typical to Mr Blanchard, challenges a standard model that “capital inflows are contractionary”.

In the paper Messrs Blanchard, Ostry, Ghosh, Chamon argue that, in alignment with emerging market policymakers’ views and historical evidence, capital (non-bond) inflows which put pressure on currency appreciation can still give rise to credit booms and rising output. The standard model of course would expect such conditions to severely hamper exports causing contraction – absent of sufficient policy rate adjustment. But this more thorough outline will be useful in assessing the impact on growth in countries like China; whom we expect will garner future inflows on the back of policy reform and international acceptance of the renminbi as a global reserve currency.

The expectation of the renminbi’s inclusion into the SDR basket this Monday should act as a milestone in this respect. But how such flows impact the broader Chinese economy may continue to be over generalised and overhyped by news outlets. Chinese policymakers, resolute on pursuing equal status with the dollar, contrarily seem less concerned about economic contraction, or a “hard landing”, given the mixed nature of the flows and the commitment and policy tools of the PBoC. The intricacies of China are interesting but complex and we value the open contributions of entities like PIIE to add depth to our analysis. If Mr Blanchard does indeed have the time to devote his intellect more thoroughly it will certainly be worth looking out for future research, especially for any collaboration between Mr Blanchard and PIIE’s China sage Nicholas Lardy.

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