Working Paper: NBER ID: w20454
Authors: Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
Abstract: The revived Bretton Woods framework we proposed in 2003 remains a useful way to understand the international financial system. We document that the system survived the 2008 crisis. Looking forward, we argue that the system will continue to evolve as we expected. China is likely to graduate from the periphery to the center in the next few years. This graduation process could be smooth or associated with recurrent financial crises. During this transition the magnitude of net capital outflows from the periphery will continue to depress real interest rates in industrial countries at every phase of the business cycle. Finally, recent policy initiatives suggest that India is poised to replace China as the dominant periphery country.
Keywords: Bretton Woods II; China; India; International Financial System; Capital Flows
JEL Codes: F21; F3; F43; F63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 2008 financial crisis (F65) | capital inflows to the U.S. (F21) |
| 2008 financial crisis (F65) | depreciation of the dollar (F31) |
| 2008 financial crisis (F65) | spike in U.S. interest rates (E43) |
| China's transition to a consumption-driven economy (F62) | current account surplus (F32) |
| China's transition to a consumption-driven economy (F62) | global interest rates (E43) |
| net capital outflows from the periphery (F32) | real interest rates in industrial countries (E43) |
| Bretton Woods II system (F33) | flow of capital from emerging markets to developed economies (F32) |