1. Discussion of: Crises and International Policy Coordination Sizing Official Reserves Gian Maria Milesi-Ferretti IMF, Research Department and CEPR

2. Crises and International Policy Coordination Causes of financial turbulence Global imbalances Yen carry trade Traditional policy coordination? Role of coordination in supervision?

3. A few general points Global Imbalances  Agree that they are not the direct driver of current financial turbulence  Direct impact: portfolio shock (decline in demand for US assets--securitized debt)  Together with decline in ST interest rates, big decline in USD  Sizable correction of CA balance underway

4. Global Imbalances (continued) Importance of valuation changes  US has liabilities in domestic currency, assets in FX  Large USD depreciation, underperformance of US stocks imply that…  US position at end-2007 broadly similar to external position at end-2001

5. The yen “mystery” Broadly agree with analysis Carry trade very profitable when implied FX volatility is very low (as it was for many years) Not just Japanese residents investing overseas…. …but also foreign investors limting non-equity exposure (ie, reserves) As MP “normalizes”, reasonable pattern of portfolio diversification should resume

6. Policy coordination What appetite for it? Importance of perceptions of past episodes (particularly in Asia) Criticism of Multilateral Consultations overstated (not a standard G-7 communiqué) Key measures in countries’ best interest

7. Supervision and coordination Agree that coordination of supervision key No illusions on what can be achieved with regulation Securitization and risk—the (presumed) advantage of securitization and much financial innovation was shifting risk to those better able to bear it

8. Emerging markets Stronger net external position Reduced FX exposure Only “traditional” EM region: emerging Europe (growth, CA deficits). Importance for euro area performance for vulnerabilities

10. Discussion of “Sizing official reserves” Dramatic increase in stock of FX reserves in many EMs Change in the composition of K-inflows to EMs – increase in portfolio equity flows (and FDI) Validity of traditional indicators of reserve coverage: changing nature of vulnerabilities/risks?

11. Increasing stock of reserves….

12. Falling external debt…..

13. Equitization?

14. Role of FDI…

15. Some general points on reserve coverage Openness up significantly…but a lot of trade is in intermediates (inputs for re-export) Comparing FX to (total liab – FDI) is extreme  It may require EMs to be creditors (there are increasing “private” holdings of foreign assets)  Currency risk characteristics of portfolio equity very different from ST for. curr. debt

16. Reserves increasing, but foreign assets of EMs take other forms as well