But in the 1990s private capital flows have increasingly dominated the international linkages to such a degree that business cycles have become desynchronized. Indeed, the ’90s were a decade of catastrophes that didn’t happen. Putting things in perspective gives one quite a different picture than assessing the euro on the basis of the bilateral exchange rate vis-à-vis the dollar since the beginning of 1999. Wasn’t the release of Nirvana’s “Nevermind,” in 1991, pretty much the last time a new rock ’n’ roll band truly, deeply mattered, the way rock ’n’ roll did in the ’60s and ’70s? Even Y2K, our terrifying end-of-the-millennium technological comeuppance, was a nonevent. This is the bland version of my title (appropriately bland as suits an international civil servant). Is the euro weak and should this be a cause for concern? Luncheon Speech by What explains this increase? In particular, the increase in private flows to emerging market countries in the 1990s clearly marked a break with the relatively moderate levels of such flows observed in the 1980s. Many countries would probably not be comfortable with that degree of volatility, particularly smaller open economies. But the crises have eased considerably in recent months. Then he told me that he had not yet prepared his speech, which I thought I could just take over. One key lesson is that the integration of capital markets implies that monetary conditions in a given country can be affected quite substantially by developments elsewhere. Of course. That there is some sort of connection with the Austrian school makes it even more appropriate to present those views here in Vienna. Financial market liberalization, removal of capital controls, search for high yields, and desire for portfolio diversification probably all played a role but there have also been some less benign reasons, including underestimation of risk and moral hazard effects resulting from various explicit and implicit government guarantees (not only in the capital importing countries). The 1990s have seen great achievements for global policy makers but also a number of new challenges associated with significant changes in the working of the global economy and in the nature of international economic and financial linkages. But I am struck by the growing concern among many economists around the world that this may well be the case and that the current U.S. expansion may eventually end in tears as has happened in so many other countries in the wake of strong upturns that eventually proved unsustainable. The question then arises whether the focus of monetary policy should be expanded to help stabilize asset markets. However, there is a good deal of evidence that overheating can manifest itself even under conditions of price stability as conventionally defined and that it may show up in balance sheets, in asset prices, or in the form of financial fragilities. This isn’t (mainly) fogeyishness on my part. In Europe and Japan this did have the expected negative impact on growth but not in the United States. After all, the decade had begun with a fantastically joyful and previously unimaginable development: The Soviet empire collapsed, global nuclear Armageddon ceased to be a thing that worried anyone very much, and the nations of Eastern Europe were mostly unchained. All rights reserved. These issues have become more pressing in light of the integration of capital markets which may be contributing to cyclical divergences across countries. But after listening to Professor Streissler's excellent presentation yesterday I no longer think that my views are all that audacious. Between 1990 and 1994 South Africa dismantled apartheid surprisingly peacefully. The third feature of the global economy that seems to have become more pronounced or more dominant in the 1990s is the sensitivity of exchange rates to cyclical developments. If one takes a longer term perspective and looks at the past value of the euro by using a synthetic measure of the real effective exchange rate based on the exchange rates of the participating currencies, then it is apparent that the current value of the euro is not particularly weak. This not only permitted the Federal Reserve to keep interest rates steady at a late stage in the cycle, it eventually allowed the Fed to ease interest rates by 75 basis points last fall in the face of widespread fears of a credit crunch following Russia's default and the near-collapse of the hedge fund LTCM. By the end of the decade, in fact, there was so much good news — a federal budget surplus, dramatic reductions in violent crime (the murder rate in the United States declined by 41 percent) and in deaths from H.I.V./AIDS — that each astounding new achievement didn’t quite register as miraculous. In the first part of the 1990s emerging Asia clearly appeared to be stimulated by the progressive easing of monetary conditions in Japan and Europe during this period. Moreover, the most recent data that have appeared in the euro area and Japan also suggest that the sluggishness in these economies and especially in Japan may also be coming to an end. There are now signs of a turnaround in the Asian crisis—afflicted economies. The recoveries in the emerging market countries recently in crises may well surprise on the upside. There are several reasons for considering that the emerging market crisis was fortuitous for the United States. Were there real problems in the ’90s? I am very pleased now that I did not in fact choose that topic because it has been discussed extensively this morning. Eliminating fiscal and monetary policy shortcomings addresses the source of some macroeconomic disturbances but certainly not all. And each of them, to my eye, looks exactly as it did when the rollout began — 13,000 ubiquitous and faintly melancholic time-capsule museums of the last best American decade. First with “The Larry Sanders Show” and then with “The Sopranos,” it proved that episodic television could accommodate major ambition and actual brilliance, ushering in an enduring new (cable) TV era. I have already mentioned several aspects of the processes that may contribute to cyclical divergences. font-family: SQMarket-Medium; During the ’90s, the only American-led war in the Middle East was the one that drove Saddam Hussein’s invading army out of Kuwait with a ground campaign that lasted a mere 100 hours. International Monetary Fund, 27thEconomics Conference: In fact I believe that I have found a soul mate in Professor Streissler. As demand and imports in the crisis countries collapsed, their external deficits swung sharply into surpluses, a swing of about USD 130 billion in a little more than one year. Has something similar been happening in the case of the United States during the past couple of years? The second question concerns the euro. url("//cdn2.editmysite.com/fonts/SQ_Market/sqmarket-medium.woff2") format("woff2"), As a result of these capital inflows, and the terms of trade gain associated with falling import prices it can be argued that overall financial conditions in the United States became easier than intended and possibly too expansionary, inadvertently contributing to the continued run-up in asset prices, particularly the stock market. Somewhat bolder titles could have been: Does the restoration of global price stability suggest that exchange rate stability is becoming easier to achieve in the future?