Breaking Free of the Triple Coincidence in International Finance

41 Pages Posted: 21 Oct 2015

See all articles by Stefan Avdjiev

Stefan Avdjiev

Bank for International Settlements (BIS)

Robert N. McCauley

Bank for International Settlements (BIS)

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: October 2015

Abstract

The traditional approach to international finance is to view capital flows as the financial counterpart to savings and investment decisions, assuming further that the GDP boundary defines both the decision-making unit and the currency area. This "triple coincidence" of GDP area, decision-making unit and currency area is an elegant simplification but misleads when financial flows are important in their own right. First, the neglect of gross flows, when only net flows are considered, can lead to misdiagnoses of financial vulnerability. Second, inattention to the effects of international currencies may lead to erroneous conclusions on exchange rate adjustment. Third, sectoral differences between corporate and official sector positions can distort welfare conclusions on the consequences of currency depreciation, as macroeconomic risks may be underestimated. This paper illustrates the pitfalls of the triple coincidence through a series of examples from the global financial system in recent years and examines alternative analytical frameworks based on balance sheets as the unit of analysis.

Keywords: capital flows, global liquidity, international currencies

JEL Classification: F30, F31, F32, F33, F34

Suggested Citation

Avdjiev, Stefan and McCauley, Robert N. and Shin, Hyun Song, Breaking Free of the Triple Coincidence in International Finance (October 2015). BIS Working Paper No. 524. Available at SSRN: https://ssrn.com/abstract=2676658

Stefan Avdjiev (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Robert N. McCauley

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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