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Abstract: Foreign exchange reserves held by central banks rose to more than 5 trillion dollars in 2006 from 1.5 trillion a decade ago and are expected to rise further in the coming years. Sovereign wealth funds manage assets in excess of 1.5 trillion dollars, and total reserves managed jointly by central banks and SWFs are forecasted to top 10 trillion dollars by 2010. This paper presents motives behind rapid reserves growth and proposes a concept of OCHAR - Opportunity Cost of Holding Ample Reserves - which is defined as a forgone GDP growth amid too conservative reserve management by central banks. We estimate OCHAR for a sample of 33 countries which accounted for three-quarters of total central bank reserves in 2005. We also argue, that unlike in XX century, where central banks used to be very secretive institutions, XXI century central banking is characterized by widespread knowledge sharing and transparency. Therefore best practices, such as inflation targeting or efficient reserve management spread out quickly and are adopted by increasing number of central banks. Thus central banks collectively embarked on a reserves diversification journey, it does appear to be the central banks collective mindset and we can speak of the global reserves management in XXI century. At the end of the paper we put forward several hypotheses of what could be the consequences of this diversification journey. It seems that relative prices of various assets will find new steady states, which may have little in common with relative valuations seen in XX century. We also expect that slowly, over time, US "exorbitant privilege" will be eliminated. Finally we consider global stability risks in the context of the new reserves management style adopted by central banks. We postulate that due to the increasingly global nature of shocks as long as central banks and governments in countries-stakeholders of global imbalances focus their actions on maintaining global price and financial stability, central banks in smaller emerging markets can afford to improve reserve management without incurring additional stability risk.
central bank, reserves, management, opportunity cost, global implications
Abstract: In this paper we identify four Gordian Knots of the global economy in the 21st century, that is 1) limits to growth: scarce energy and natural disasters, 2) aging of the developed world and the 21st century as the age of migration, 3) the rise of China and the failure of democracy, and 4) rising significance of global financial markets and emergence of new global players. We describe what policies are adopted at international and European level to deal with these Gordian knots and assess, when it can be done, what are the strengths and flaws of these polices. Finally we suggest "outside-the-box" Alexandrian solutions to some of these problems. We argue that while the natural resources constitute limits to growth in the medium run, the humanity ability to develop disruptive innovations will challenge those limits in the long run. We therefore call on the Club of Rome to broaden its discussion as what appeared as the main Gordian knot of the 21st century some 30 years ago should now be seen in a broader context. Europe has immense challenges and opportunities lying ahead. It is high time that the Club of Rome warns politicians which so diligently take Europe towards the dead end called global marginalization. Lack of strategic vision, national patriotism, protectionism, inability to see developing countries as legitimate global players. All these strategic weaknesses will strike back and will lead to weak Europe, unable to play an important global role in the 21st century. It is not to late avoid this gloomy scenario.
growth limits, aging, migration, Chinafrica, democracy, sovereign wealth funds
Abstract: The goal of this paper is to identify factors that will be crucially important for maintaining long-term sustainable growth in three dimensions: economic growth, social cohesion and environmental sustainability. We document how Central and East European countries score in all three aspects in comparison with the peer group of countries. While a sizeable progress has taken place in all three dimensions, the future prospects will depend crucially on institutional and knowledge infrastructure. Institutional environment in CEE-4 is generally conducive to sustainable economic growth, there are independent monetary institutions, economies are as open and deregulated as in EU-15 member states. However, there is still a substantial gap with the EU-15 with regard to the legal system and property rights. Both the old Europe and the new Europe have much bigger governments than NIEs or the U.S. We argue that old Europe can sustain its standard of living only when it remains of the world innovation frontier. This can be achieved only when Europe's intellectual capital is properly developed. We document that while the old Europe scores well in many measures of intellectual capital, China and NIEs are rapidly closing the gap, or even leapfrogged Europe in some aspects. We present a broad range of indicators showing that the new Europe has very low ability to generate innovations and will not be able to develop intellectual capital unless a dramatic shift in structural policies takes place. Based on our research we formulate policy recommendations. We call on authorities to abolish the "destructive creation" of the Lisbon agenda, with many contradictory ideas floated and a lost sense of strategic direction. A new long-term vision, of strong and prosperous Europe in 2050 has to be developed. There will be no success in the 21st century without courage or luck. Those who do not wish to make their future prosperity a hostage of pure luck need to show courage to change their policies towards developing proper innovation capacity. It is high time to act!
Innovation, sustainable growth, Lisbon agenda, social cohesion, strategic focus, intellectual capital
Abstract: Many economists, politicians and strategy analysts notice that the rise of China or emergence of BRIC countries as a new powerhouse may pose a threat to Europe's or U.S. role in the global economy. But many also argue that the standard of living in Europe can be preserved amid Europe's thought leadership, ability to innovate and create new products and services. Middle and low income countries are seen as the FDI target and the source of cheap labor. Author deeply disagrees with such a view and presents evidence that without major reforms Europe is making rapid progress towards becoming meaningless in the global economy of the 21st century. While Europe is stuck in never ending debates about its future, Asian countries are making a rapid progress by making strategic alliances with African countries, which is a very sound investment in the future relationship capital. Asia is also making rapid progress in building other parts of intellectual capital, and is very likely to become the global innovation centre in the coming decades. Finally, Asia is making efforts to develop deep and well functioning financial markets, which will leverage the region's growth potential. By making the analogy to the 20th century growth divergence between U.S. and Argentina, author calls on Europe's authorities to wake up, if Europe does not want to become the Argentina of the 21st century.
Europe, Chindia, Chinafrica, vision, innovation
Abstract: We propose an extension to the inflation targeting regime currently pursued by Poland. It incorporates the exchange rate stability constraints as imposed by the obligatory participation in the ERM2 that Poland needs to satisfy prior to adopting the euro. The modified policy is based on the forward-looking inflation targeting supplemented with the exchange rate stability objective. Its effective implementation depends on the determined long-term equilibrium exchange rate and the observed degree of exchange rate volatility. Both are empirically estimated by employing the Johansen cointegration tests and the threshold generalized autoregressive heteroscedasticity model with the in-mean extension and generalized error distribution (TGARCH-M-GED).
Inflation targeting, Monetary convergence, ERM2, Euro, Poland, Cointegration, GARCH
Abstract: This study proposes an extension to the inflation targeting framework for Poland that takes into consideration the exchange rate stability constraints imposed by the obligatory participation in the ERM2 on the path to the euro. The modified policy framework is based on targeting the differential between the domestic and the implicit euro area inflation forecasts. The exchange rate stability objective enters the central bank reaction function and is treated as an indicator variable. Adjustments of interest rates respond to changes in the relative inflation forecast, while foreign exchange market intervention is applied for the purpose of stabilizing the exchange rate. The dynamic market equilibrium exchange rate is ascertained by employing the Johanssen cointegration tests and the threshold generalized autoregressive heteroscedasticity model with the in-mean extension and generalized error distribution (TGARCH-M-GED).
inflation targeting, monetary convergence, ERM2, euro, Poland, cointegration, GARCH
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