Hot Money Flows, Commodity Price Cycles and Financial Repression in the USA and China: The Consequences of Near‐zero US Interest Rates

• Published date: 01 July 2013
• Author: Ronald McKinnon
• DOI: http://doi.org/10.1111/j.1749-124X.2013.12025.x
• Date: 01 July 2013

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China &World Economy / 1–13,Vol. 21, No. 4,2013

©2013TheAuthor

China &WorldEconomy ©2013 Instituteof WorldEconomics and Politics,ChineseAcademyof Social Sciences

HotMoneyFlows,Commodity PriceCyclesand

FinancialRepressionintheUSAandChina:The

ConsequencesofNear-zeroUSInterestRates

RonaldMcKinnon*

Abstract

Undernear-zeroUSinterestrates,theinternationaldollarstandardmalfunctions.Emerging

marketswithnaturallyhigherinterestratesareswampedwithhotmoneyinflows.Emerging

marketcentral banksinterveneto preventtheircurrenciesfromrising precipitately.They

losemonetarycontroland domesticprices begininflating. Primary commodityprices rise

worldwideunlessinterruptedbyaninternational bankingcrisis.Thiscyclicalinflationon

the dollar’speripheryonly registers intheUS coreconsumer price index withalong lag.

The zerointerest ratepolicy alsofails to stimulatethe US economy as domestic financial

intermediation by banksand money market mutualfundsis repressed. BecauseChina is

forcedto keepitsinterestratesbelow market-clearing levels, italso suffers fromfinancial

repression, although inaformdiffering from thatinthe USA.

Keywords: commodity price,financial repression,hot moneyflows, zerointerestrate

JELcodes:F31,F32

I.HotmoneyFlowsandInflationinEmergingMarkets

Theinternationaldollarstandardis malfunctioning.TheFederalReserve ’sreduction ofthe

interestrateon federal fundsto virtuallyzeroin December2008(a movethatwasfollowed

byother industrialcountries)exacerbatedthewideinterestratedifferentials withemerging

marketsandprovokedworldmonetaryinstability byinducingmassivehot moneyoutflows

bycarry tradersintoAsiaandLatinAmerica(McKinnon,2013).A “carrytrader”isonewho

exploitsinterestratedifferentialsacrosscountriesbyborrowinginlowinterestrate

currencies toinvest incurrencydomainswith higher interestrates(Menkhoff etal.,2012).

*RonaldMcKinnon,Professor,DepartmentofEconomics,StanfordUniversity,Stanford,CA,USA.

Email:mckinnon@stanford.edu.