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CTV British Columbia picture WILDFIRES RAGE IN MONTANA,BRITISH COLUMBIA,CALIFORNIA

FIRES AND EXPLOSIONS

REVELATION 8:7
7 The first angel sounded, and there followed hail and fire mingled with blood, and they were cast upon the earth: and the third part of trees was burnt up, and all green grass was burnt up.

Fire EvacuationsBy Kyle Midura Story Published: Sep 4, 2009 at 9:33 PM MDT

COLUMBUS - The Mount Eagle fire continues to force Columbus area residents out of their homes. One hundred homes have been evacuated and hundreds more are on notice.

Multimedia Watch The Video Tom Newkirk watered down his home before evacuating Thursday night. When he returned, it was clear just how close the fire came. Newkirk watched the fire as it neared the interstate, Then it jumped the highway, and it came right on up chasing us on this side and so it just kept coming, you can see that.He's not out of the woods yet, the fire has already claimed one structure, and may soon force him to leave again. It's still spreading, and officials warn that Friday afternoon weather may speed up the fire.If the temperatures are real high with low humidity and we get any wind at all then it's gonna kick up,said Dwayne Andrews with County Assistance.Other residents refuse to budge despite evacuation orders. Newkirk says firefighters deserve a lot of credit for keeping his home unharmed, They're doing a good job today, they've covered it, and yesterday they were all over these hills.Officials said they're not only battling the fire, but tough terrain as well.It's real steep, rocky terrain and it's scattered Ponderosa pine in it,said Andrews, Access to a lot of it, it's not motorized access, it's by foot travel, people hiking in and putting in fire line.Despite the tough conditions Andrews said the crews have performed well.They've done an excellent effort on structure protection,he said,as you can see the fire's burned up right adjacent to some of these homes yet the homes are still standing and in beautiful shape.But Andrews warned, the danger is far from over.

Heavy rain helps firefighters battle massive B.C. wildfires
Canwest News ServiceSeptember 4, 2009

B.C. has had a particularly active fire season this summer, with nearly 220,000 hectares charred by almost 3,000 fires — the highest rate of wildfire since 2003.Photograph by: Andy Clark, ReutersKAMLOOPS, B.C. — Heavy rain and cooler temperatures appear to have helped firefighters battling several massive wildfires in the British Columbia Interior.Elise Riedlinger, a fire information officer in Kamloops, B.C., said approximately 15 millimetres of rain fell overnight on the 2,200hectare fire burning near the Kamloops-area town of Pritchard where an evacuation order is in place.She said that blaze was 50 per cent contained, while 167 firefighters continued to try to bring it under control. Another nearby fire, the Notch Hill blaze, covers an area of 3,000 hectares and there is still an evacuation order for the residents remained. Fire officials plan to allow some of the residents to return home on Sunday.The fire also saw gusty winds up to 70 kilometres an hour so it was very dangerous for our firefighters,said Riedlinger.Crews had to get pulled off because the rain was so heavy.On Thursday, Forests and Range Minister Pat Bell said the province was still struggling to contain the wildfires, with about 250 new fire starts in the last week.Campfire bans are still in place for areas around Kamloops and Cariboo, B.C., while restrictions have been applied to the coastal and southeastern regions of the province. Officials warn campers to check their local status before lighting any campfires.B.C. has had a particularly active fire season this summer, with nearly 220,000 hectares charred by almost 3,000 fires — the highest rate of wildfire since 2003. In that year, more than 230,000 hectares were burned by this time, but 600 fewer fires were responsible.

LA FIRES
http://www.youtube.com/watch?v=ILqRslAkSXI&feature=player_embedded

Fire no longer threatening LA-area communities By JAMES BELTRAN, Associated Press Writer – SEPT 5,09

LOS ANGELES – The western flank of the deadly wildfire north of Los Angeles was under control Saturday, sparing foothill communities further threat as it burned east into a large wilderness area.Investigators, meanwhile, were trying to determine who ignited the blaze that killed two firefighters, destroyed at least 76 homes and burned nearly 242 square miles of the Angeles National Forest.The fire's origin near Angeles Crest Highway remained cordoned off as authorities sought more clues in the case, but they were hesitant to release any findings to the media.Arsonists are not stupid. They can read, said U.S. Forest Service Cmdr. Rita Wears, who supervises federal agents investigating the fire.I have to be very careful.Los Angeles County firefighters Tedmund Hall and Arnaldo Quinones were killed Aug. 30 while seeking an escape route for their inmate fire crew after flames overran their camp on Mount Gleason.Sheriff's detectives opened a homicide investigation after the fire was ruled arson earlier this week, and Gov. Arnold Schwarzenegger has offered $100,000 for information leading to the arrest and conviction of the culprit.The fire, one of the largest in Southern California history, was 49 percent contained by early Saturday afternoon after crews built protective lines on the northwestern flank near Santa Clarita, according to Forest Service spokeswoman Jan Ulrich.

Firefighters were trying to slow the fire's eastern movement into the San Gabriel Wilderness and secure the southeastern flank north of Monrovia and other foothill communities. No homes were threatened, Ulrich said.The weekend weather forecast called for cooler temperatures and slightly higher humidity that could help firefighters further surround the blaze.Mount Wilson — which holds a historic observatory and at least 20 television transmission towers, radio and cell phone antennas — appeared well-protected after flames came dangerously close earlier this week.However, we've still got the potential all around us, said Quinn MacLeod, the U.S. Forest Service's supervisor for Mount Wilson.MacLeod ordered crews to wrap communication towers with protective material and clear areas of concern on Mount Wilson's western slope where smoke was rising from various hot spots. He pointed to two 5,000-gallon trucks filled with retardant.Those are like our ace in the hole, he said.Fire agencies have spent $37 million to fight the blaze, which started Aug. 26 and has scorched 154,655 acres.MacLeod said monetary costs are irrelevant, considering the fire has already killed firefighters.My whole philosophy is, one billion dollars? I'm OK with that,he said.If it's lost and nobody gets hurt, I'm OK with that.At least a dozen investigators were working to analyze clues found at a charred hillside near Angeles Crest Highway, including incendiary material reported to have been found there. Officials said the fire was arson but were still investigating who started it and how.We are in the early stages, just beginning to put things together,said sheriff's Lt. Liam Gallagher, who is heading the homicide investigation.Firefighters losing their lives in the line of duty is an added incentive, but we work every case to the fullest.Near a large shade tree where crews get their daily briefings, firefighters set up a makeshift memorial for Capt. Hall and Specialist Quinones. The fallen firefighters helped save about 60 members of their inmate crew from approaching flames when they set a backfire that allowed the group to get to safety. The pair died when their truck plunged 800 feet off a steep mountain road.

County and state corrections officials are considering rebuilding the camp and naming it after the firefighters, though they were not sure if the same site would be chosen.That would be hallowed ground,said state Corrections Department Lt. David Foote, the camp commander at Mount Gleason and friend of the victims. We're trying to come up with something positive out of this tragedy.Foote said he has struggled to cope with the deaths, but is finding some comfort in remembering the good times, such as a Christmas party last year at Hall's home in which the captain dressed up like Santa Claus and put Foote's daughter on his lap. We were family,he said. Foote compared the fire investigation to an arson three years ago in which five federal firefighters died battling a blaze 90 miles east of Los Angeles. Raymond Oyler was convicted of five counts of murder for starting that blaze and was sentenced to death.Foote wants the culprit in the latest fire to face the same fate.I hope justice prevails,he said.Associated Press writers Allen G. Breed and Raquel Maria Dillon in Los Angeles contributed to this report.

Los Angeles wildfire drives wildlife to backyards
Fri Sep 4, 2009 9:06pm EDT By Steve Gorman

LOS ANGELES, Sept 4 (Reuters) - For residents of the scenic foothill communities above Los Angeles, chance encounters with deer, coyote and other wildlife are commonplace. The occasional bear or mountain lion will even wander into a backyard.
They're about to become more visible.As the threat to humans from the 10-day-old Station Fire subsides, allowing displaced families to settle back into their homes, four-legged refugees are starting to emerge dazed, injured and hungry from the charred chaparral of the San Gabriel Mountains.The Los Angeles County Public Health Department issued an advisory to residents on Friday warning them to avoid wild animals that may have been displaced by the fires and urging people not to feed them.

Animal control agencies say more residents are calling to report distressed or nuisance wildlife, and they expect those calls to increase as critters frightened into hiding from the fire begin to forage again for food and water.The wildlife will start coming down closer to urban areas outside of places you would normally expect them,said Ricky Whitman, spokeswoman for the Pasadena Humane Society.Some people have reported seeing injured animals -- bears, some deer,she said. We got a call from a woman yesterday ... and her backyard was loaded with deer. But she was upset because they were eating her bushes. They're hungry, they're thirsty, they've been driven out by the fire and they really might eat your bushes.More than 145,000 acres (58,000 hectares) have burned, mostly in Angeles National Forest, in what is now the 10th largest fire on record in California.One prominent resident of the fire zone is a mountain lion known to frequent ridgelines above NASA's Jet Propulsion Laboratory, an area that burned last week. But the big cat has not been seen since since the blaze.

MORE DESPERATE, MORE BRAZEN

Coyotes, which regularly roam foothill neighborhoods to prey on small pets, may become more brazen than usual in their search for a meal.My advice to people in the foothills is to keep your domestic animals inside, cats and dogs, and certainly children,Whitman said.Experts say the biggest long-term fire threat may be to some of the least-noticed forest denizens: imperiled amphibians such as the mountain yellow-legged frog and arroyo toad, or birds such as the cactus wren or California spotted owl.These creatures already are suffering from the effects of urbanization and can little afford further fragmentation of habitat, U.S. Forest Service biologist Leslie Welch said.The deer, the raccoons, the bear, none of these are endangered. Not that we shouldn't care about them, but they're going to be OK as a species,said Travis Longcore, a University of Southern California wildlife specialist.Large-scale incineration of dense mountain vegetation in the San Gabriel Mountains may not be all bad for some species.Bighorn sheep, which inhabit higher elevations and thrive in areas where their chief predator, mountain lions, have less cover, actually appeared to have grown in number following previous fires in the San Gabriels, Welch said.The Humane Society provides temporary shelter for wildlife, but so far has been busier dealing with the pets of evacuees.Someone brought us six wild ducks that they saw coming down out of the mountains when the fire was going, Whitman said.We got them a big portable swimming pool. They might have been confused but they were really happy.(Editing by Mary Milliken and Will Dunham)

Davis County Carves Out Fire Break To Save Homes from Wildfires-Road will stretch from Farmington to Centerville to protect homes in foothills Ben Winslow Fox 13 Reporter 6:03 PM MDT, September 4, 2009

FARMINGTON, Utah - It's a view to die for, but people who live along the foothills here in Davis County also live with the threat of wildfires. Dry brush and scrub oak trees are kindling for a wildfire. To help guard against wildfires racing down the canyons above Farmington and Centerville, Davis County leaders are carving out a fire break road in the mountainside. Wildfires in the area over the past decade have prompted many evacuations of residents who live close to the foothills.I think those events more or less served as a catalyst to look at ways to improve fire access and fire safety in our canyons,said Max Forbush, the Farmington City Manager.The fire break road starts in the north end of Farmington, above Lund Lane. It extends all the way through Farmington. Construction is expected to begin in October on a portion of the fire break road in Centerville, taking it all the way past Pages Lane.

Davis County Public Works Director Kirk Schmalz said the fire break road will serve two purposes: It will help protect homes from wildfires that race down the mountain. It will also allow firefighters to have easier access to the area.You've got a better chance of stopping it on the side of the hill than on the edge of the city, Schmalz told Fox 13 News, adding that a fire hydrant has been installed along the fire break road to give firefighters help.Residents who live along the foothills say it's needed.I think it's a good idea,said Stacy Walker.I think it'll be really good for them to get a fire break road up there.The road cost the city of Farmington about $50,000, Forbush said. The state reimbursed the city for one-third of the cost.© 2009, KSTU-TV

5 weeks on the brink: Reliving meltdown of '08 By ERIN McCLAM, AP National Writer – Sat Sep 5, 2:47 pm ET

NEW YORK – The nation was focused on a tropical storm spinning off the Carolinas and a hurricane headed for Florida. People were gaming out how a political novice named Sarah Palin might upend the presidential campaign.The Dow Jones industrial average closed at 11,220 on Sept. 5, the Friday after Labor Day last year. There was an economic slowdown under way — no one doubted that. Whether it amounted to a bona fide recession was semantics, a question for economists.But on Sunday morning, the federal government took an extraordinary step: It seized control of mortgage giants Fannie Mae and Freddie Mac, committing up to $200 billion of taxpayer money.The companies, which combined either hold or guarantee half the mortgage debt in America, were posting billions of dollars in losses each quarter as an increasing number of homeowners stopped paying back their loans. Investors doubted the companies had the financial strength to survive the housing crash.President George W. Bush, with less than five months to go in his presidency, said taking over Fannie and Freddie would be critical to returning the economy to stronger sustained growth.

It turned out to be the beginning of something much more dire — far beyond a correction, far beyond even a garden-variety recession, far beyond anything most people had lived through.What it turned out to be was the beginning of five weeks that shook the American financial system to its foundations. The stock market convulsed. Wall Street itself was redrawn. The word depression was suddenly on everyone's lips.One year later, the economy is only now beginning to show signs — tentative at that — of pulling out of the Great Recession, the longest economic contraction since World War II. The Dow, while still more than 30 percent off its peak, is no longer the source of a daily national ulcer.But for five weeks in September and October last year, venerable Wall Street investment houses staggered, or disintegrated outright. The government concocted unprecedented rescue plans with 12-digit price tags almost impossible to comprehend.

It was a time when no place for money seemed safe.

In those first few days after the government stepped in to save Fannie and Freddie, Wall Street liked what it saw. Analysts figured interest rates on mortgages would drop substantially because of the security offered by the federal intervention.The Dow floated back over 11,500. And after a long year of rising foreclosures, particularly on homes held by the less-than-ideal borrowers, there was hope of a turnaround.It saves Armageddon from happening,one insider, Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York, offered on the Monday after the Fannie and Freddie takeover.

But not 24 hours later, the landscape looked very different.

The next day, Sept. 9, Wall Street was consumed by worries about Lehman Brothers, the fourth-largest investment bank in the country, hammered by the deterioration of its heavy portfolio of mortgage-backed securities and other real estate-related assets.Specifically, investors wondered whether Lehman had enough cash to survive. Talks with a state-owned Korean bank broke down. And the U.S. government was conspicuously silent.By day's end, Lehman's stock price had fallen by almost half. The bank, which predated the Civil War and had survived the Great Depression, was left with a market value of $5.4 billion — less than the online discount broker TD Ameritrade.There were whispers that Lehman's lenders, who provided the money it needed to stay in business, were about to run for the hills.For the rest of the week, investor confidence in Lehman steadily eroded. That weekend, officials from the Treasury Department, the Federal Reserve and major Wall Street banks met at the New York Fed's stately headquarters in downtown Manhattan.Treasury Secretary Henry Paulson was adamantly opposed to having the government step in to save Lehman. No other bank stepped forward, either. Instead, Bank of America, pushed by the Fed and Treasury Department, bought Merrill Lynch, another storied but troubled Wall Street investment house.Meanwhile, that Sunday night, the buzzards began circling at Lehman's Manhattan headquarters. Television crews lined the avenue across from the building, which featured giant, high-tech video screens. People held up cell phones and took pictures.Are you enjoying watching this? one man said as he left the building.You think this is funny? Not many people who paid attention to finance did. On Monday, Sept. 15, Lehman, founded in Alabama to serve cotton farmers, a firm that survived even the destruction of its headquarters in and around the World Trade Center, filed for bankruptcy.

Now three of the former Big Five investment houses — Lehman, Merrill and Bear Stearns, which had been forced to sell itself to JPMorgan Chase earlier in the year —were gone, at least in their former, mighty forms. The financial crisis shifted into a terrifying higher gear.The Dow lost more than 504 points that day, the most since the New York Stock Exchange reopened after the 9/11 terrorist attacks. About $700 billion in stock market wealth, much of it tied up in retirement plans, evaporated.

And now there were other problems: It had become painfully apparent that banks had hundreds of billions of dollars in bad debt on their books, most of it from risky bets made on securities tied to mortgages that were going sour.Credit markets, which had been in turmoil for the better part of a year, began to tighten even further. And a new name surfaced on the financial death-watch list: American International Group, the largest insurer in the world.Like Lehman Brothers, AIG had been hammered by the implosion of the subprime mortgage market and the credit crisis. The difference? It did business with almost every financial institution in the world, selling disastrously mispriced insurance policies on exotic investments.AIG was so large, its tentacles so vast, that its collapse could have done almost inconceivable damage around the world. If Lehman's fall had dealt a body blow to the global economy, AIG had the potential for a knockout.So the government stepped in again — this time with an emergency $85 billion loan. In exchange, the government got a stake of nearly 80 percent in the company.The American taxpayer now owned two mortgage giants and the world's biggest insurer.Lehman Brothers and AIG had both assured investors in the months before that they would be fine. Now no one trusted anyone. Wall Street responded with another anxiety attack. On Wednesday, Sept. 17, the Dow fell 449 more points.People are scared to death, said Bill Stone, chief investment strategist for PNC Wealth Management.And they were scared around the world. The crisis that infected the U.S. financial system posed grave danger around the world — not just by hammering markets, but by plunging the world into a severe recession, perhaps worse.With the panic in full motion and banks hoarding cash, central banks around the world decided to work together. On Sept. 18, they pledged to inject as much as $180 billion into money market funds to head off what they feared could be a wave of panicked withdrawals.Back home, in Washington, the Fed pumped $105 billion into the U.S. banking system, and Bush canceled a trip to huddle with economic advisers. But everyone knew the solution would need to be much grander.That afternoon, the Dow shot up 400 points, most of it in the final hours of trading, on a report that the government was putting together a plan to buy the bad debt off the books of banks.

The idea was that it would cleanse balance sheets of the difficult-to-value mortgage-related assets that were holding them back. No one knew exactly how much they were worth, so no one really knew exactly how sick the banks were.At the Capitol on the night of Friday, Sept. 19 and in conference calls the following day, Paulson and Fed chief Ben Bernanke laid out a nightmare scenario: Say no to the plan and risk an utter collapse on Wall Street and maybe even a worldwide depression.When you listen to them describing this,said New York Sen. Charles Schumer, who was in the room, you gulp.A name caught on for the junk clogging bank balance sheets: toxic assets. And if that sounded strange, it was nothing compared with the price tag that surfaced over that weekend: $700 billion.Twelve digits long, eight times as big as the AIG rescue, a number so big most Americans couldn't even comprehend it.President Bush, seeking both to soothe a highly anxious nation and prod Congress into passing the breathtaking bailout, said: This is a big package because it was a big problem.More ominously, speaking of the tumultuous week in finance, he said: So when one card started to go, we were worried about the whole deck going down, and so therefore moved, and moved hard.Sens. John McCain and Barack Obama, in the middle of their fall presidential campaign, both supported the bailout package. House Republicans voiced strong objections. Besides being too expensive, they said, the program blurred public and private enterprise.In a bit of theatrics in the White House Cabinet Room, Paulson knelt before House Speaker Nancy Pelosi, begging her to pass the bailout package even if it meant forgoing Republican support. According to other published accounts of the meeting, Bush, speaking of the economy, warned:If money isn't loosened up, this sucker could go down.

In the nation's banking system, the aftershocks continued.

On Thursday, Sept. 25, Washington Mutual — which earlier in the decade had run TV commercials mocking stodgy bankers in suits and hyping "the power of yes" in its eagerness to grant mortgages — was seized by the Federal Deposit Insurance Corp., the largest American bank failure ever. What was left was gobbled up by JPMorgan Chase.Four days later, Citigroup agreed to buy the banking operations of Wachovia, which, like WaMu, had done huge business in adjustable-rate mortgages, enticing borrowers who later defaulted on their home loans. (Wells Fargo later bested Citigroup's offer and bought all of Wachovia.)That same day, Monday, Sept. 29, the bailout came up for a vote in the House. As the roll call began, the Dow was down about 210 points.Representatives locked in their votes while C-SPAN showed the running tally. The no totals marched higher and higher. On Wall Street, traders' faces were tense. Their jaws literally dropped.The bailout failed, 228-205. In a span of just five minutes, the Dow fell 400 more points. When the closing bell mercifully sounded, it was off nearly 778 points, easily its worst performance ever. More than $1 trillion in market value had evaporated, a first.The Dow stood at 10,365. Congressional leaders scrambled to find a way to pass the bailout. Wall Street rallied the next day, Sept. 30, but remained nervous. If it doesn't pass, then look out below,one trader said. It could get ugly.It finally did pass, and was swiftly signed into law on Oct. 3, after Republicans won provisions to raise the amount of personal bank deposits insured by the government and an easing of accounting rules for banks.It got ugly anyway. From there, the stock market executed a slow-motion crash.On Monday, Oct. 5, the Dow swooned below 10,000 for the first time since 2004, making an elevator-shaft drop of 800 points, its biggest ever during a single trading day, before recovering somewhat.The next day, 508 points more. The day after that, 189 — despite an emergency interest-rate cut by the Federal Reserve. The day after that, 678. And on Friday, Oct. 10, 128 more.

In a single week, the Dow had lost almost 20 percent of its value, a staggering 1,874-point plunge. The average stood at 8,451, its lowest level in more than five years. It was the worst week in the history of the stock market.On the floor of the New York Stock Exchange, anxiety ran so high that one trader compared it to a football game — when the Dow would peek into positive territory, lusty cheers would go up. The following Monday, Oct. 13, Secretary Paulson summoned the CEOs of the nation's biggest banks to an extraordinary meeting at the Treasury. He told them that instead of buying their toxic assets, he had decided it was best to inject $125 billion into their institutions to signal to the world that the government would not let any of them fail. The strings attached included limits on executive pay and dividends, and after much grumbling all of the CEOs signed on before leaving.The program was later extended to hundreds of other banks around the country, but the issue of toxic assets on bank balance sheets remains to this day.The nation settled in for an economic winter whose length no one could predict. Traders were drowning their sorrows in bars near the exchange. And at a nearby coffee shop, Sandeep Bhanote was reflecting on the week with a Wall Street friend.I have a client who lived through the Depression and wars and everything, said Bhanote, a software engineer.And he said,You know, we survived, and you will, too.In hindsight, it sounds like common sense. But only in hindsight.

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G-20 to maintain economic stimulus measures
By JANE WARDELL The Associated Press SEPT 5,09

LONDON — Top finance officials from rich and developing countries on Saturday pledged to maintain stimulus measures to boost the global economy, warning that the fledging recovery that provided the backdrop to their meeting is by no means assured.British Prime Minister Gordon Brown, right, makes his opening remarks as he attends the first meeting of the day of the G20 Finance Ministers Meeting held at the Treasury in central London, Saturday, Sept. 5, 2009. Brown will urge G20 finance ministers meeting in London not to be too hasty to end the emergency measures that saw huge amounts of money pumped into economies after the credit crunch, as they seek a way out of the crisis.Group of 20 finance ministers also promised a crackdown on bankers' pay — while stopping short of a European push for a cap on bonuses — and agreed to giving developing countries a greater say in international financial institutions.A joint communique said that fiscal and monetary policy will stay expansionary for as long as needed to reduce the chances of a double-dip recession after the worst financial crisis since World War II.Financial markets are stabilizing and the global economy is improving, but we do remain cautious about the outlook for growth and jobs,British Treasury chief Alistair Darling, the host of the London meeting, said.We agreed that we would continue to implement our necessary support measures — inclusing monetary and fiscal policies — consistent with price stability and long-term fiscal sustainability until recovery is secured.The International Monetary Fund has said that the global economy is beginning a sluggish recovery from its worst recession since World War II, raising its estimate for global economic growth in 2010 to 2.5 percent, from an April projection of 1.9 percent.

But the IMF also downgraded its forecast for this year to a contraction of 1.4 percent, from 1.3 percent. Japan, Germany, France and Australia all recorded growth in the second quarter. Other countries like Britain, which is expected to move back into growth in the third quarter, have been slower to recover.The financial system is showing signs of repair,said U.S. Treasury Secretary Timothy Geithner.Growth is now underway. However, we still face significant challenges ahead.There is a fear that withdrawing any time soon from the trillions of dollars worth of extraordinary stimulus packages that have been pumped into the ailing world economy in recent months could result in a double-dip recession.Germany and France had previously pushed for more discussion of a so-called exit strategy from the massive stimulus measures, arguing that spending measures have taken government debt to dangerously high levels, but have backed away from the issue in London.The G-20 also pledged restrictions on excessive bankers' pay in a bid to address concerns about the risk-promoting bonus culture blamed for fueling the current crisis.The communique said that work will continue on the possibility of introducing a cap mechanism for financial sector bonuses but did not commit to the measure after U.S. and British objections to the French-German proposal.Instead, the G-20 proposed clawback mechanisms to ensure that bonuses are linked to the long-term success of deals and could be forfeited if they fail to deliver over a period of years.Darling said the new measures would make sure that institutions are focused on long-term sustainability and long-term strength.Darling said banks must realize that they would not be here had it not been for the efforts of countries, underwritten by the taxpayer,and there must be no more cases in which people are being rewarded for reckless behavior.

The Financial Stability Board, an international body established at the London Summit of G-20 leaders in April, was given the task of drawing up practical proposals for implementation at the Sept. 24-25 leaders meeting in Pittsburgh.The United States had tried to put the focus of the London meeting, which is a preparatory gathering for the leaders summit, on its proposal for a new international accord to increase banks' capital reserves. The U.S. wants to establish stronger international standards for the reserves banks are required to hold to cover potential loan losses.Going into the meeting, U.S. Treasury Secretary Geithner wanted to reach agreement on an accord by the end of 2010, with implementation by the end of 2012.The communique did not directly address that plan, but called for rapid progress in developing stronger prudential regulation, including a requirement that banks hold more and better capital once recovery is assured.British Prime Minister Gordon Brown won support for his push to take tougher action against tax havens, with the G-20 agreeing to a March 2010 deadline to start sanctions against tax havens which refuse to comply with new transparency rules agreed at the April G-20 leaders' summit in London.The G-20 also reaffirmed its commitment to reform of the World Bank and the International Monetary Fund to give developing countries a great say on those bodies.The BRIC proposed a quota shift of 7percent in the IMF and 6 percent in the World Bank Group to reach an equitable distribution of voting power between advanced and developing countries.The G-20 stopped short of that, but said it will complete World Bank reforms by spring 2010 and the next IMF quota review by January 2011.The G-20 includes 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, Britain and the United States. The European Union, represented by its rotating presidency and the European Central Bank, is the 20th member.

Recovery difficult as jobless rate hits 9.7 pct By CHRISTOPHER S. RUGABER, AP Economics Writer – Fri Sep 4, 5:59 pm ET

WASHINGTON – At least it's not all bad anymore.The nation's unemployment rate climbed last month to 9.7 percent — the highest in nearly a generation — but the number of job losses was less than expected and the smallest monthly total in a year.
It's good to see the rate of job losses slow down,said Nigel Gault, chief U.S. economist at IHS Global Insight. But with unemployment rising,there isn't the underlying fuel there for strong consumer spending growth,which is vital for a strong recovery.Employers shed 216,000 jobs in August, the Labor Department said Friday. That was 9,000 fewer than expected but a far cry from the job creation required to rejuvenate the economy: about 125,000 new jobs each month just to keep the unemployment rate from increasing.The unemployment rate rose three-tenths of a percentage point since July, reaching its highest level since 1983, when it was 10.1 percent. Economists predict that the jobless rate will peak above 10 percent by the middle of next year.At the same time, many analysts say the economy should grow by a healthy 3 to 4 percent in the third quarter, pulling the United States out of the longest recession since World War II.

Most of that improvement, though, stems from auto companies and other manufacturers refilling their depleted stockpiles. Those inventories had plummeted as factories and retailers sought to bring goods more in line with reduced sales during the recession. Without stepped-up demand from consumers, any current economy growth might not last.The Obama administration's $787 billion stimulus package of tax cuts and increased spending contributed to the improvement, along with the popular Cash for Clunkers program. The clunkers program provided up to $4,500 in rebates to consumers who traded in old gas-guzzlers for newer models.An $8,000 tax credit for first-time home buyers has also helped boost housing sales and stabilize prices, after years of declines.Yet economists worry that none of that will be enough to sustain an economic recovery once the government's efforts fade. As job losses persist and the unemployment rate climbs, even people with jobs will remain anxious about losing them and about spending too much.Complicating the problem is that even people with good jobs are likely to remain tighter with their money for years to come. Having suffered deep losses in their home equity and stock portfolios, and still stuck with heavy debt loads, Americans will not spend as freely as they did before the recession.Some economists even fear a so-called double-dip recession, which would cause the economy to shrink again next year.That's one of the reasons why businesses are reluctant to hire people, said Sung Won Sohn, an economics professor at Cal State University, Channel Islands.They're not at all sure the economic bottoming is for real.Gault does not foresee a double-dip recession. But he thinks that the economy, after growing at a 3.7 percent pace in the current quarter, will slow to 2 percent growth in the first three months of next year.For now, the August unemployment report sketched a bleak portrait of the job market. The number of jobless Americans jumped by nearly 500,000 to 14.9 million.If laid-off workers who have settled for part-time work or given up seeking jobs are included, the so-called underemployment rate hit 16.8 percent last month. That's the highest such rate on records dating to 1994.

The number of workers who worked part time — because their hours were cut or they could find only part-time jobs — rose by about 300,000. As business improves, companies may switch many of those part-timers to full-time work before they add new employees. That's one reason why analysts expect the unemployment rate to keep rising.Companies are also squeezing more work out of fewer people. Productivity, a measure of output per hour worked, jumped 6.6 percent in the April-June quarter. It was the largest advance since the summer of 2003.The report is likely to renew debate about the effectiveness of the Obama administration's $787 billion stimulus package. Administration officials say the program has already saved or created 500,000 to 700,000 jobs. Labor Secretary Hilda Solis said Friday that stimulus money is still being injected into the economy.The recession has done more damage than could ever be fixed in half a year,Solis said.Some analysts are pushing for more stimulus. Lawrence Mishel, president of the Economic Policy Institute, argues the federal government should create more jobs and provide tax credits for companies that hire.Until we get robust job growth, and a rapid path to low unemployment, we need to do much more,Mishel said.Alan Krueger, the Treasury Department's chief economist, said Friday that the administration is considering whether some programs, such as extended jobless benefits or support for housing or other parts of the stimulus program, should be further extended. But he said no decisions had been made.One modestly bright side for those with jobs: Earnings ticked up, and the number of hours worked remained above a recent record-low.On Wall Street, stocks rallied. The Dow Jones industrial average added about 77 points, and broader indexes also moved up.

The recession has eliminated a net total of 6.9 million jobs since it began in December 2007. Job cuts last month remained widespread across many sectors. The construction industry alone lost 65,000 jobs.It doesn't look like a whole lot of those shovel-ready projects have been started,Joel Naroff, president of Naroff Economic Advisors, wrote in a note to clients.Factories cut 63,000 jobs. Retailers pared 9,600. The financial sector eliminated 28,000 jobs, and professional and business services dropped 22,000. Even the government sector shed 18,000 jobs, as the U.S. Postal Service cut 8,500 positions, and state and local governments laid off teachers and other school workers.Temporary-help services cut 6,500 jobs, an unfortunate sign because employers are likely to hire temp workers if they need more labor before turning to permanent hires.Health care and educational services was the only bright spot, adding 52,000 workers.AP Economics Writer Martin Crutsinger contributed to this report.

BoC's Carney says global recovery not established By Louise Egan – Sat Sep 5, 1:06 pm ET

LONDON (Reuters) – Bank of Canada Governor Mark Carney said on Saturday that Canada would implement new bank capital rules endorsed by the G20 and that the country was making good headway in implementing tougher international standards aimed at preventing a repeat of the financial crisis.Canada's banks have been famously well capitalized and stable through the crisis due to stricter regulations and a conservative banking culture.But both Carney and Finance Minister Jim Flaherty pledged to do more domestically as part of a concerted G20 effort to fix flawed capital rules and risk management practices by banks.There are going to be changes to bank capital regulations. Those are being developed internationally,Carney said at a news conference following the G20 meeting of finance ministers and central bankers.When they're agreed, they will be applied in Canada and we are leading in those discussions and there's a host of other things that can be done to extend our advantage in financial stability and financial markets.It is not clear yet whether the central bank will take the lead in the new regulatory drive domestically. Carney has in the past suggested the central bank could take on a greater role in so-called macroprudential regulation but on Saturday he acknowledged that most of the international rules fell under the jurisdiction of the finance minister.Canada is making very good progress on implementing all the G20 recommendations ... Obviously the bulk of the recommendations are under the direct responsibility of the minister of finance, the department of finance,he said.

Carney also said the global economic recovery is not yet fully established. He said policy makers will monitor leading indicators on business and consumer confidence, employment, investment indicators and disposable income to judge when the recovery is ensured.When do you have that hand-off to the private sector? ... It is a range of factors that we will be looking at across the G20,he said.The central bank chief declined to comment on the Canadian economic outlook as he is restricted from doing so in the run-up to the bank's September 10 interest rate decision.(Reporting by Louise Egan; editing by Keith Weir)

VIDEO OF THE SPEECH
http://www.imf.org/external/mmedia/view.asp?eventid=1573

IMF Managing Director Dominique Strauss-Kahn Sees Renewed Stability But Remains Cautious About Global Economic Recovery, Notes Need For Continued Policy Actions Press Release No.09/295 September 4, 2009

International Monetary Fund Managing Director Dominique Strauss-Kahn, delivering the 2009 Bundesbank Lecture today in Berlin, said stimulus measures adopted to combat the global crisis should be withdrawn only when the economic recovery has taken hold and unemployment is set to decline.While acknowledging that the global economy appears to be emerging from the worst financial and economic crisis in the post-war period, Mr. Strauss-Kahn emphasized that the recovery will be sluggish and that a jobless recovery remains a risk. I am concerned about the social and economic costs of high unemployment, which will persist even as financial markets and output stabilizes, he said.Given the fragility of the recovery, he warned that Policymakers should err on the side of caution as they decide when to exit from their crisis response policies.He added, however, that governments should develop their exit plans now so that they are able to build public support and act when the time is right.Mr. Strauss-Kahn underlined that international policy coordination has been an essential part of the response to the crisis and that coordination of exit strategies will be just as important.Thanks to concerted and forceful policy actions, the crisis had been contained, he said.

He focused on three policy areas essential to ensure a sustainable recovery:

1. Identifying New Sources of Growth-On the demand side, the baton will eventually need to be passed from the public to the private sector,he said. He also called for a global rebalancing of demand across countries, which would require strong policy actions--including fixing the financial system in advanced economies and boosting domestic spending in emerging Asia.On the supply side, he called for reforms that boost productivity—by increasing labor market flexibility and competition in product markets. He also said that advances in green technology could even become the microprocessor revolution of tomorrow—while at the same time helping address global climate change.On macroeconomic policies, he emphasized that addressing concerns about fiscal sustainability is of the first order of importance—including spending due to aging which is more than ten times the fiscal cost of the crisis. On inflation, Mr. Strauss-Kahn said that he did not expect it to become an issue until the recovery was firmly underway.

2. Reforming the Financial Sector
He expressed concern that the improvement in financial markets is leading to complacency in dealing with remaining and difficult problems in the banking system. He urged policy makers to remain focused on the crisis response agenda, which includes undertaking a comprehensive diagnosis of banking systems and launching asset-management programs to deal with banks’ bad assets.On financial regulation, he cautioned that reforms are not proceeding as quickly as necessary. He called for increasing capital requirements and making them more sensitive to risk. He added that the operational framework for macroprudential supervision remains a work in progress.With regard to financial sector compensation, he noted that a culture of risk-taking in major financial firms had been an important factor in the crisis, and he raised concerns that financial sector recovery could lead to business as usual. He said that the international community must stand together to make meaningful progress in this area.

3. Strengthening the International Monetary System
While noting that many proposals had emerged for reforming the international monetary system, he said that the current system, despite its problems, is working better than is often said.The U.S. dollar had actually strengthened during the crisis, which in his view reflects the dollar’s status as an unrivaled safe haven asset.To make the international monetary system more stable, he emphasized that reducing countries’ demand for reserves and strengthening insurance mechanisms would be essential. The IMF could play an important role in this regard and ideas that could be explored include: making access to its funding more predictable; making Special Drawing Right allocations more responsive to global developments; and increasing the Fund’s resource base.IMF EXTERNAL RELATIONS DEPARTMENT

Beyond the Crisis: Sustainable Growth and a Stable International Monetary System Speech by Dominique Strauss-Kahn, Managing Director of the International Monetary Fund At the Sixth Annual Bundesbank Lecture Berlin, September 4, 2009 As Prepared for Delivery

It is a great pleasure to be here today, speaking to this eminent audience at such a pivotal time in global economic and financial affairs.I will begin with a few words on the economic outlook, before addressing three key issues that arise when we think about moving beyond the crisis.The global economy appears to be emerging at last from the worst economic downturn in our lifetimes. Several advanced economies, including France and Germany, have already returned to growth, and emerging economies are recovering even more strongly.However, I expect this recovery to be relatively sluggish. In the advanced economies, it is still largely driven by policy stimulus and restocking, with underlying private demand remaining weak. The outlook for the emerging economies is considerably better, though the pace of recovery in advanced trading partners remains a risk.Given the fragility of the recovery, there are risks that it could stall—though thankfully these risks appear to be receding. Premature exit from accommodative monetary and fiscal policies is a principal concern. In addition, problems in the financial sector could persist or even intensify further, particularly if efforts to restore banks to health are not completed.Let me also add that international coordination of exit strategies will be just as important, if not more important, than the very good coordination we have seen already in response to the crisis.Looking ahead, I am concerned about the third phase of this crisis following on the heels of the financial and economic phases—namely high unemployment. We expect unemployment to continue rising through next year, as economic growth falls short of potential. And a jobless recovery remains a risk. Having so many people out of work has significant economic costs, ranging from lower private demand to a decline in potential growth if structural unemployment rises. The social consequences are potentially even more worrisome.For these reasons, I believe that policy makers should err on the side of caution as they decide when to exit from their crisis response policies. Having said this, I do think the time is right for policymakers to develop their exit strategies—because failure to clarify and formulate these plans will risk undermining confidence and the recovery process itself.

In my remarks today, I want to focus on three questions related to the global economy’s transition beyond the crisis.First, what will be the new sources of growth?
Second, are we addressing problems in the financial sector with sufficient urgency?
And third, how can the stability of the international monetary system be improved?

Of course, there are other issues. One of the most important is probably what needs to be done to support the low-income countries. I will address this point in detail in a separate speech this month.

I. What Will Sustain the Recovery in the Coming Years?

Let me now turn to the first of my three points: what is needed to sustain global growth in the coming years.

A. Demand-side issues

Let me begin with the fundamental question at hand, namely what the sources of growth will be in the coming years.At the national level, the baton will eventually need to be passed from the public to the private sector as crisis response policies are unwound. However, as I will discuss in more detail later, the time to exit from stimulus measures will depend to a large extent on the recovery of private sector demand.At the global level, weaker demand in some economies will need to be offset by stronger foreign demand in other countries. In fact, dramatic changes in global demand are already taking place. For example, household saving in the U.S. has risen to 5 percent of disposable income, from about zero a few years ago. This, combined with weaker investment, has reduced the U.S. current account deficit dramatically. Similar changes are taking place in other current-account deficit countries.These developments are in line with what the Fund had been asking for many years already. Our assessment was that the very high current account deficits that some countries had been running were unsustainable in the medium term, given rising concerns about foreign indebtedness. Indeed, the need for rebalancing underpinned the IMF-sponsored Multilateral Consultations on Global Imbalances that took place in 2006/07.The policy imperatives for achieving a sustainable rebalancing of global demand will be familiar to many of you.In advanced economies, rapid progress toward fixing the financial system is essential to support productivity and growth.In emerging Asia (notably China), structural efforts that boost domestic spending, such as improving access to credit for households and small-scale business, should be accelerated. Stronger social security systems and higher spending on education and health would also help reduce precautionary saving.Also in emerging Asia and oil exporters, public investment spending (concentrated on infrastructure and also on green initiatives) would boost domestic demand.More flexible exchange rate management in some countries would be a valuable policy complement, increasing demand for imports in current-account surplus countries and encouraging a shift in resources from tradable to non-tradable sectors.Global rebalancing of demand could also have important implications for investment and innovation. With consumers in emerging markets playing a bigger role, the composition of global production is likely to change. For example, we could see demand for high-technology goods decline. This makes it all the more important for policy makers to accelerate reforms that reduce barriers to competition and thus support innovation.

B. Supply-side issues

Allow me to turn now to some important supply-side issues more generally.History suggests that the financial crisis may inflict long-term damage on the supply capacity of the economy. The sharp fall in investment may lower effective capital, and job losses may be translating into higher structural unemployment.Reforms that boost productivity have therefore taken on renewed importance. Labor market reforms, including those that increase labor market flexibility and support job search and training, can facilitate the redeployment of workers from crisis-hit sectors to other, more vibrant parts of the economy. Product market reforms—particularly in services—could create new jobs and boost productivity. Financial sector reforms would also boost efficiency (even though financial sectors are likely to shrink in advanced economies).Here in Europe, I would urge leaders to recommit themselves to the Lisbon agenda. Reforms under this program had already helped raise employment across the continent before the financial crisis erupted. But for many EU economies (including Germany), there is still room for improvement in service sector productivity. Reducing regulatory constraints would be a good step in this direction.

Efforts to boost the green economy could also play a role. A number of countries have already undertaken green stimulus measures—for example, to improve energy efficiency—that are helping to sustain aggregate demand and employment. These measures could also have powerful induced effects on technological innovation. Advances in “green” technology could even become the microprocessor revolution of tomorrow—while at the same time helping address global climate change.

C. Exit policies

As I said earlier, I see a real danger that policy makers may jeopardize the recovery by exiting from crisis measures too soon. Having said this, the time is right for policy makers to formulate their exit strategies.Addressing concerns about fiscal sustainability—and hence macroeconomic stability—is of the first order of importance. The advanced economies are currently on an unsustainable path, with the average public debt-to-GDP ratio set to rise to 115 percent of GDP by 2014. Significant fiscal adjustment will therefore be essential to ensure debt sustainability. Given the scale of the problem, plans for achieving this adjustment are needed now to anchor market expectations and contain long-term interest rates.

The most important step is to contain pension and health care costs. Indeed, in the advanced economies the net present value of future spending due to aging is more than 10 times the fiscal cost of the crisis. While cost-cutting reforms in this area may be politically difficult, they are essential to ensure fiscal sustainability. In some countries, reforming spending beyond education and health may also be necessary, while tax reform may be critical in others.Turning to central banks, they will face challenging decisions of when and how to tighten policy. I do not see this as an immediate concern, since inflation is unlikely to reemerge until the recovery is firmly underway. However, exiting will require difficult decisions, complicated further by the complex technical and operational problems posed by the enormous expansion of central bank balance sheets. For example, unwinding the unconventional measures taken by central banks (such as term lending facilities) will affect monetary conditions. Therefore, to anchor inflation expectations securely, central banks will need to be exceptionally clear in communicating their assessment of price pressures—as well as their view of conditions in the financial markets.Central banks may also face challenges to their independence. Political pressures to inflate the debt away could emerge. These must be resisted, given the serious and potentially long-lasting costs of inflation. In addition, concerns about potential capital losses from expanded balance sheets could distract central banks from focusing on price stability and supporting economic recovery. Governments must therefore provide assurances that they will back up their central bank’s capital.Finally, let me repeat how important it is to continue supporting demand until the recovery has firmly taken hold. Unwinding the stimulus too soon runs a real risk of derailing the recovery, with potentially significant implications for growth and unemployment. Therefore, exit policies should only be launched once there are clear indications that the recovery has taken hold and that unemployment is set to decline.

II. Reform of the Financial Sector

I turn now to my second question, which focuses on the financial sector.With the one-year anniversary of the Lehman Brothers’ collapse just around the corner, it’s a good time to take stock of the progress made so far in reforming the financial sector—and of what still needs to be done.

A. Crisis response measures

I am heartened by the stabilization of financial markets that has taken place over the last year. Credit and equity markets have rebounded. Bank liquidity is plentiful, thanks to central bank provisions, and wholesale money markets have reopened. Capital markets are showing renewed signs of life, and are contributing to the recovery of financial institutions.But I still see serious downside risks to financial stability. Mounting delinquencies mean banks remain under strain, with developments in the commercial real estate sector of particular concern. Private securitization markets are still impaired. And households and the financial sector continue to deleverage.I also worry that the improvement in financial markets is leading to complacency in dealing with remaining and difficult problems in the banking system. I see several areas where progress in restoring financial stability must be accelerated:A comprehensive diagnosis of banking systems remains extremely important, especially given that non-performing loans may increase over the coming months.Launching asset-management programs is also critical. This is needed not only to deal with assets already on bank books, but also to offset the impact of rising non-performing loans.And formal policy coordination across countries must be strengthened. This will become particularly important as countries begin to design their exit strategies.I urge policy makers to remain focused on completing this crisis-response agenda. Not doing so raises serious concerns that systemic risks could re-emerge in the global financial system, with clear knock-on effects for economic growth. Greater clarity in communicating policy intentions to the public is also essential to shore up confidence.

B. Regulatory reform

Let me now look beyond crisis response measures, and to the regulatory reforms needed to create a safer and more stable financial sector.The good news is that there is broad-based agreement on the principal lessons of the financial crisis, namely that regulation and supervision must do a better job of mitigating systemic risks. Preventive measures are needed to reduce the likelihood of crises. These include widening the regulatory perimeter and making it more flexible; increasing the amount and quality of bank capital and the liquidity buffers they carry; allowing prudential frameworks to play a greater stabilizing role over the business cycle; and intensifying the regulation and supervision of systemically important institutions. Measures to improve crisis management are also critical, and include addressing difficult cross-border resolution issues.The bad news, however, is that the reform effort is not proceeding as quickly as is necessary to address the problems raised by the crisis. To be sure, this is no simple task: reforms must be sufficiently forward-looking to anticipate tomorrow’s problems, yet not so restrictive that they stifle innovation and growth in the financial sector.Some progress has already been made on strengthening microprudential regulation. For example, the Basel Committee has made recommendations for strengthening the regulatory capital framework. But more work is needed here. In particular, a key lesson of the financial crisis is that capital requirements cannot be lenient. They must therefore not only be increased, but also made more variable in order to prevent excessive risk taking.Development of an operational framework for macroprudential supervision remains work in progress. There is broad agreement on the needed components for such a system: procyclicality of regulation must be dampened, and systemically important financial institutions must be supervised better. However, methodological issues have posed challenges to international agreement on new regulations.

Addressing cross-border resolution issues remains one of the greatest challenges. We must keep pressing ahead—for in the absence of an agreement for how to solve conflicts across borders, the risk of national interests being put ahead of the greater global good increases significantly.We must also act decisively to promote the reform of compensation policies in the financial industry. The risk-taking culture that has been the hallmark of major financial firms—with generous bonuses rewarding high short-term profits, and insufficient regard for longer-term risks—contributed to problems of procyclicality and hence was an important factor in the crisis. And I worry that as the financial sector emerges from crisis, a business as usual mentality may prevent serious progress from being made.The international community must stand together to make meaningful progress in this area. This will help overcome governments’ concerns about the potential loss of competitiveness if only a few countries adjust their compensation policies. I expect that more traction on this issue may emerge following this weekend’s G-20 Finance Ministers’ meeting in London.

C. The IMF’s Role in Financial Sector Reform

What is the Fund’s role in regulatory reform?

At the outset, let me be clear that we are not a global financial regulator—nor do we aspire to be! That is the responsibility of national regulatory and supervisory agencies.Having said this, we do take very seriously our responsibility to support national and multilateral efforts to strengthen financial regulation. Besides contributing to the formulation of new regulations and providing technical assistance in this area, our key mandate is surveillance of the financial sector. We are therefore stepping up our monitoring of the adoption and implementation of new standards and regulatory changes. This is in line with the G-20’s request that our monitoring include the evolving framework of macroprudential supervision.

III. Bolstering the Stability of the International Monetary System

Turning to my third question, let me now share some thoughts with you on the international monetary system. By this, I mean the broad set of rules and institutions that govern international payments.In the wake of the financial crisis, concerns about the current system have once again emerged. Critics have noted that the role of the U.S. dollar may have been seriously undermined by the United States’ economic and financial problems. In particular, they worry that its large fiscal imbalances present serious risks to the value of the dollar, and hence of disorderly adjustment.I note, however, that the U.S. dollar actually strengthened during the crisis. In my view, this reflects the dollar’s status as an unrivaled safe haven asset.The question about what shape the international monetary system should take is an important one, and one of the oldest in international finance. As early as the 1940s, John Maynard Keynes proposed the creation of a super-sovereign currency, the so-called bancor. More recent proposals call for the creation of a new world reserve currency, possibly based on the SDR—the composite currency issued by the IMF. Another possibility, and perhaps the least unlikely alternative, is for a multi-reserve currency system to emerge, with currencies like the euro, the yen, and even the renminbi serving as co-equal anchors.It is my sense that this question will be decided over the coming decade, rather than the coming months, based as much on political considerations as economic ones. As the global economy evolves, we are likely to see new currencies rise in stature and international usage, leading perhaps to a system with several co-equal anchor currencies. The international community may even decide that the creation and promotion of a new reserve currency is what would be best, though this would of course require a significant step-up in global policy coordination.

It is my view that the current international monetary system, despite its problems, is working better than is often said. It proved resilient during the recent crisis, and near-term concerns about the dollar can be eased with appropriate policy actions from the U.S. authorities. Indeed, durably anchoring the fiscal, monetary and financial regulatory policies of the main reserve issuer would go a long way towards stabilizing the international monetary system.But I believe it could be made even more resilient if countries’ appetite for self-insurance—and hence their demand for reserves—could be reduced. This demand, which is expected to rise further in the wake of the crisis, is at the heart of a recurring source of instability of the IMS: it makes it considerably more challenging for the main reserve issuer to achieve fiscal and external balance while providing sufficient safe assets to the rest of the world. (Economists refer to this as the Triffin dilemma.) Moreover, large stockpiles of foreign reserves breed uncertainty since the management of these assets could be driven by non-market considerations.Because self-insurance is costly, reducing the demand for reserves would also deliver dividends to individual countries. By investing in foreign reserves rather than in their own economies, countries with large reserve stockpiles have missed out on potentially high-return domestic investments, like education and infrastructure.I see various ways to reduce the need for self-insurance. At the country level, sound economic policies clearly can reduce the need for insurance over time as policy credibility is enhanced and confidence in currencies is strengthened. At the global level, we should seek ways to reduce the impact of volatile capital flows and hence their potential to disrupt financial systems. Third-party insurance should in theory be the most efficient alternative, but pricing uncertainties and significant counterparty risks have prevented the emergence of a market for this. Borrowing from a global or regional reserves pool, or through access to a lender of last resort, is in practice the most likely alternative.Indeed, in recognition of the need to strengthen systemic insurance mechanisms, the international community has taken steps to strengthen the Fund’s role. At its April summit, G-20 leaders called for a near tripling of our lending resources to $750 billion, and over the past year a number of steps have been taken to reform and expand the Fund’s lending facilities.I believe that the IMF could do even more to support the international monetary system in the future:The procedures related to accessing our short-term Flexible Credit Line and other lending facilities could be modified to make this form of insurance more predictable.
SDR allocations could be made more responsive to global developments and flexible to country circumstances.The Fund’s resource base (or insurance pool) could be increased further. Even after its recent tripling, it is still smaller as a share of global GDP—and even smaller as a share of global capital flows—than it was when the Fund was created.

IV. Concluding Thoughts

In my remarks today, my goal was to focus our attention on some of the key questions that relate to the global economy’s transition beyond the crisis.While global growth appears to have turned the corner, we should not forget that so far, this has been mainly due to massive policy support. And while it is right—and in fact policy makers’ responsibility—to start formulating exit policies now, they should by no means be implemented until there are clear signs that the recovery is firmly underway. In particular, given the high and lasting cost of unemployment, policy makers should err on the side of caution rather than jeopardize the recovery.We are definitely making progress towards creating a safer and more stable financial system—but much remains to be done. In particular, capital requirements need to be strengthened, so that they are not only larger, but also reflect better the riskiness of bank activities. And on compensation policy, we need to align bankers’ incentives much better with longer-term performance than with short-term profits.

Finally, let me close with a renewed call for international policy coordination—and express my support for Minister Steinbrueck’s recent remarks on this issue.The crisis has shown that international policy coordination is an essential part of a crisis response. Thanks to concerted and forceful policy actions, the world’s policy makers were able to keep this once-in-a-lifetime crisis from becoming a full-blown depression.The crisis also demonstrated the irreplaceable role of the multilateral institutions. Whether in support of the international policy response, or as providers of financing, they have played a critical role in the global response to the crisis. Looking ahead, they must remain at the center of reshaping the international financial system.Thank you for your kind attention. I would be happy to take some of your questions.

SEPTEMBER 5, 2009, 11:30 A.M. ET IMF Head: G20 Now Needs To Act On Bank Pay, Capital By Tom Barkley Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--International Monetary Fund Managing Director Dominique Strauss-Kahn praised the Group of 20 Saturday for an unprecedented level of cooperation in agreeing to maintain anti-crisis measures, tackle banker compensation and toughen capital standards.But he also said countries now need to follow through on pledges to work together on further reforming the global financial system.I'm impressed by the level of consensus, but I'm still waiting for strong measures to be decided and also to be implemented at the national level,he said.But Strauss-Kahn was optimistic that the crisis is ending, saying the G20's actions have avoided a possible catastrophe.On Saturday, IMF also achieved the G20's target of getting enough commitments to triple its resources, he said, saying pledges by Singapore and Mexico put it over the top of the $500 billion needed.On reforming the institution to give developing countries more say, he said he expects G20 leaders meeting in Pittsburgh later this month to announce additional steps.But beyond just redistributing quotas, he said some emerging countries are calling for a doubling of the number of IMF quotas to provide a permanent funding boost.-By Tom Barkley, Dow Jones Newswires; 202-862-9275; tom.barkley@dowjones.com

SEPTEMBER 5, 2009, 12:08 P.M. ET G20: US Geithner:World Expects Dollar To Stay Reserve Currency By Tom Barkley Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--U.S. Treasury Secretary Timothy Geithner said Saturday the world expects the dollar to remain the major reserve currency. When asked about proposals by countries like China and Russia to find an alternative to the dollar as a reserve currency, he said, We expect, and the world expects, the dollar to be the principal reserve currency of the global economy for a long period of time.He also said there was broad agreement among his Group of 20 counterparts on restricting bank compensation practices.Downplaying divisions over the issue of tackling bankers' bonuses, Geithner said there was a consensus on the core principles around compensation practices and denied that some countries were proposing a cap on bonuses.I don't believe any country or any government is actually proposing to set actual limits globally on compensation amounts,he said during a press conference following the G20 meeting.-By Tom Barkley, Dow Jones Newswires; 202-862-9275; tom.barkley@dowjones.com

No clear recovery is evident,says Flaherty
(CP) – SEPT 5,09

OTTAWA — Finance Minister Jim Flaherty says it's too early to be talking about economic recovery from the global recession.Speaking from London after a meeting of G20 finance ministers, Flaherty said today that all agreed the world economy is stabilizing but no clear recovery is evident.Flaherty says it's prudent to remain cautious because there are still fears the economy could slip back into recession.

The finance minister noted Canada's unemployment rate is at a 10-year high of 8.7 per cent, while some reports indicate the federal deficit could balloon past this year's projected $50 billion.Still, Flaherty says Ottawa does not plan to increase taxes or reduce federal transfers to the provinces.He says the government has other options to reduce the deficit, including revenue from mild economic growth and other spending reductions.Flaherty will be delivering an economic report this month when Parliament returns from its summer break.2009 The Canadian Press.

G20 finmins meeting in London Sept 5
Sat Sep 5, 2009 1:01pm EDT

LONDON (Reuters) - Finance ministers and central bankers from the G20 nations agreed on Saturday that extraordinary economic stimulus measures should stay in place until recovery is secured.They skirted around the issue of slapping limits on banker pay and bonuses and kicked the issue forward to the Pittsburgh leaders summit September 24-25.Following are a selection of key quotes.

COMMENTS AFTER G20 MEETING-SWEDISH FINANCE MINISTER ANDERS BORG, CURRENT EU PRESIDENCY

On climate change I must admit that Europe has high ambitions, we would really like to push forward toward Pittsburgh and eventually Copenhagen meeting, and to it is clear that the comments (in the communique) we were able to reach were not satisfactory. Obviously there are different view on this issue, for us it is a major challenge. You know the numbers, there are hundreds of millions of people who are seriously affected by climate change and we urgently need to move forward on financing and mitigation. We would have been very happy to move further than we were able to at this meeting. I think now we must rely on the U.S. to make progress for Pittsburg.

EU ECONOMIC, MONETARY AFFAIRS COMMISSIONER JOAQUIN ALMUNIA

ECONOMY:We need to fully implement the stimulus that was adopted to contribute to the recovery that is showing to us positive signals. (There are) good figures in some of our countries but it is not yet sustainable. We need these fiscal and monetary instruments to help demand, but at the same time, given that we know these good figures of the second quarter of this year and the revised forecasts by the ECB and OECD, we know that a lot of factors are still policy driven. We need to introduce sustainability in our economies from the point of view of growth and public finances.CLIMATE CHANGE: We cannot forget our long-term challenges. It is urgent to tackle our long-term challenges, in particular climate change and I am also a little disappointed by the lack of positive commitment today.

AUSTRALIAN TREASURER WAYNE SWAN

This global recession is not a sprint, it's a marathon, and there's a lot more that remains to be done. What stands out for me is the determination to implement economic stimulus.It's pleasing to see that the G20 and the IMF understand the importance of fully implementing econ stimulus to keep customers going through the doors of business and to keep people employed while the global economy is fragile.We had a discussion about the need for coordinated exit strategies when the time is right, and ministers of course believe that the time is not right yet. We had a talk about the need to involve the IMF and the Financial Stability Board in assessing the time and also looking at possible strategies.

ARGENTINA ECONOMY MINISTER, AMADO BOUDOU

One piece of good news, the document includes a specific consideration toward countries that are allowed to define their own exit strategy. This is a marked difference from the Washington consensus where everyone was fitted into the same framework, and the programs were defined by the multilateral agencies.This could be defined as the absence of a single approach.

ECB GOVERNING COUNCIL MEMBER CHRISTIAN NOYER ON BASEL II

The statement of (U.S. Treasury Secretary) Tim Geithner for me, it was really the moment where the United States joined the common position that strengthening bank capital would be addressed in the Basel II framework.I am very pleased that the communique reconfirms that everybody is in agreement for it to be a universal norm that all the G20 countries will put in place very quickly.

JAPAN SENIOR VICE FINANCE MINISTER WATARU TAKESHITA

Even with a change in government, there will be no change to Japan's stance that international cooperation is necessary to overcome the economic and financial crisis.
Bank compensation should be such that it avoids excessive risk-taking.Japan's economy is showing signs of growth, but jobs are still a concern.

BANK OF JAPAN GOVERNOR MASAAKI SHIRAKAWA

We did not discuss monetary policies of individual central banks at the G20 meeting. But it is appropriate to have a transparent and credible process for withdrawing extraordinary policies.

JEAN-CLAUDE TRICHET, PRESIDENT, EUROPEAN CENTRAL BANK

The time is certainly not a time for complacency in any respect.What is important is that our credibility is there. We know how to go into the exit mode. Nobody is disputing that, it is extremely important. On the other hand, it is not yet time. It is premature to declare the crisis over.But any time when it will be necessary in our own judgment and on our own analysis of the inflationary risk, and of the anchoring of inflation expectations, we will do what will be necessary.

BRAZILIAN FINANCE MINISTER GUIDO MANTEGA

(Our suggestion) is 7 percent should be transferred from the share of participants from developed countries to emerging countries. Today many European countries have lost much of their former importance so they are over-represented. They should transfer some of their quota to emerging countries.

FRENCH ECONOMY MINISTER CHRISTINE LAGARDE:

The conclusion is that we reached agreement on the key issues.The first key issue was our determination to continue to stimulate our economy in order to strengthen the stabilization process while at the same time considering exit strategies which in due course will be implementable on a timely basis depending on the country's situation, but we concluded that the economic situation was fragile and that we need to continue our effort to support it.ON BONUSES: All countries, even those which did not want to use language that included the words remuneration, or limits were in agreement.....We've asked the FSB to come back to Pittsburgh with actual proposals concerning limitations of remunerations and that is a very important point.Bonuses are quite outrageous and we cannot let that continue as it is at the moment.

ON BANK CAPITAL AND BASEL II

(U.S. Treasury Secretary) Timothy Geithner was very clear on the subject, he said there was not the least ambiguity and that the United States would conform with Basel II.

GERMAN FINANCE MINISTER PEER STEINBRUECK

ON EXIT STRATEGIES:I can't define a timetable right now, but policymakers will be well advised to be prepared because when this crisis is over, we will have to think how to consolidate our budgets again, how to prevent worldwide inflation and how to get authorities to invest in infrastructure and R&D and not in stabilizing the banking system.

EUROPEAN CENTRAL BANK'S AXEL WEBER:

The calming in financial markets is no reason to let up on reforms, either on banking or in regulation.We have to be cautious, a lot of the recovery we've seen has been from the stimulus measures. Some of the consumption has been brought forward -- from the car scrappage scheme.German second quarter growth was very good and it looks like the third quarter will be even better, but we have to be cautious about 2010.

RUSSIAN FINANCE MINISTER ALEXEI KUDRIN

ON IMF REFORM:There are no grounds to expect decision on this (quotas) in Pittsburgh. On IMF I think it will happen next year, not earlier...For now we haven't yet started a rapprochement.ON CLIMATE CHANGE: Some participants thought we should make a strong statement on this issue, including possibly increasing the resources allocated to it. The other contingent thought this discussion, and these decisions should take place in Copenhagen.COMPARED TO APRIL SUMMIT? That was probably a more important meeting because we worked out a range of measures, where as now we were assessing the results. Then, we were meeting after two quarters of (economic) freefall, unprecedented in world history. Today everyone was in a calmer mood.ON BONUSES Expectations were very high in terms of (agreement on) bonuses, which is unfair in relation to a meeting which was 80 percent focused on other issues...The media attention was disproportionately focused on the bonuses.

UK FINANCE MINISTER ALISTAIR DARLING

ON ECONOMIC OUTLOOK:No one should think the job's done. There is a lot of risk, there is a lot of uncertainty and a lot of obstacles to be negotiated.But provided countries show and demonstrate their determination to do everything they can to support their economies, I am confident we can get through this. I am confident but that confidence has to be tempered by a sensible dose of caution.ON BONUSES: I am pretty clear that if you try and cap bonuses at a set sum it would be pretty easy ... to get your way around it.... A regulator might take a view on whether or not a particular pool of bonuses ... whether or not the pool set aside is reasonable with regard to the financial health of the institution.

ITALIAN FINANCE MINISTER GIULIO TREMONTI

The deal on banks compensations wants to send a wider message: it does not make sense that banks manage governments and politics Tremonti said at the sidelines of G20 meeting.It does not make sense that banks are larger than governments since their problems become governments' problems.Banks have raised a lot of money from governments, especially abroad, but they are not lending enough to companies... this is a problem also for Italy.

GERMAN DEPUTY FINANCE MINISTER JOERG ASMUSSEN

ON EXIT STRATEGY:No one said the crisis is already over. We are seeing a stabilization.No one said we should today withdraw the expansive monetary, fiscal stimulus and financial market stabilization measures, but there was a consensus that we should prepare so that in the future we should withdraw these measures in a coordinated and cooperative way.

BRITISH PRIME MINISTER GORDON BROWN:

ON G20 COOPERATION:Twelve months ago people were afraid for their savings as bank after bank threatened to fall. Even six months ago people were still talking about the possibility of a Great Depression.We are at a new and critical juncture for cooperation in the global economy.This is not the time for complacency or over-confidence.ON REMOVING STIMULUS TOO EARLY: It would be an error of historic proportions if we were to repeat the errors of the 1930s.... With more than half of the total five trillion (dollar) fiscal expansion yet to start, I believe the prudent course is for G20 countries to deliver these fiscal plans and the stimulus packages that have been put in place and make sure that they are implemented in full both this year and the next.

IMF ONE MONEY-ONE MARKET-TEXT
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Transcript of a Press Briefing by Caroline Atkinson, Director, External Relations, IMF Washington, D.C. Thursday, August 27, 2009

MS. ATKINSON: Good morning. I am Caroline Atkinson, Director of the External Relations Department at the IMF. I'd like to welcome you and the journalists contributing and participating via the Media Briefing Center to our biweekly press briefing. This is the first one we've had for a couple of weeks or a few weeks because of the recess.Let me start with a couple of announcements. First, on the Managing Director and his travel, he will be in Berlin on September 4 where he will deliver a speech on sustainable growth and a stable international monetary system at a Bundesbank event. It's scheduled for 11:00 a.m. local time, and is an invitation-only event, but we hope to distribute an embargoed copy of the speech ahead of time to the press.The Managing Director will then travel to London for the G-20 Ministerial Meeting on September 4 and 5, and we will give you further details about his press availability closer to the time. But please also contact Media Relations Division if you have any specific questions or requests. He will then be going to Brussels for a seminar and returning back here. We're not sure whether there will be prepared remarks, but of course if there are we will release those to you.On the operational side, you've got used to talk about SDR allocation and we want to let you know that tomorrow, August 28, the IMF will officially implement the recently approved general allocation of special drawing rights, equivalent to about $250 billion. This was the allocation initially pressed for at the G-20 meeting in the spring in London. It was formally approved by the IMF's Board of Governors on August 7 and is designed to provide more global liquidity to the world economy by supplementing our members' foreign exchange reserves. And it is of course a prime example of the quick multilateral response to the financial crisis.The equivalent of nearly $100 billion of this $250 billion will go to emerging markets and developing countries, and over $18 billion to low-income countries. This general allocation is made in proportion to members' existing quotas and will count immediately toward their reserves. Members can choose either to hold them in their reserves or if they wish to, sell all or part of their allocations to others in order to finance immediate hard currency imports. That is possible, and likewise it's possible to enter into an agreement to buy these SDRs from another member.

Separately, we are about to implement on September 9 a special allocation, a one-time allocation, of 21.5 billion SDRs, about US$33 billion. This allocation, which is sometimes called the Fourth Amendment Allocation because it required an amendment to the Fund's Articles of Agreement, will mean that every member country has an SDR allocation. Until now, countries—which is about a fifth of the membership which had joined the Fund after 1981, had not received any allocation, so now this will rectify that imbalance. More information and background on these two SDR allocations is available on our website at www.imf.org, and there are also fact sheets and Q's and A's there.Lastly, on the Annual Meetings which of course as you know are going to take place in Istanbul in late September and early October, just to remind you that online press registration is open. A link to the registration feature is available on the home page of our website and on the journalist page. And we have also just this week put up a Road to Istanbul webpage.Let me now turn to questions and ask people to submit questions also at this time.I have a question here on Latvia asking for any more guidance on when the Latvia release will be distributed. Just to let you know that the Latvia review, as you know, is being discussed today by our Executive Board and we will let you know later today whether there will be a press release today or tomorrow morning. We plan a conference call tomorrow morning as we had done after the staff-level agreement and we will make all of those timing arrangements available to you as soon as we know them. Are there other questions?

QUESTIONER: I was looking at the Board agenda and there is something next week about an exercise with the Financial Stability Forum. Is there any way to know what's going on, what type of exercise it is?

MS. ATKINSON: I'm afraid I'll have to get back to you on that one. I'm not sure what it is. The exercise that we're doing with the Financial Stability Board of course is concerning early warnings, but I'm not sure if that's at the Board and I apologize. I'll get back to you on that one.

QUESTIONER: When the Managing Director will be in Europe at the upcoming G-20, is he going to present any paper there to the ministers, and what type of message is he going to give about growth or the economy in general?

MS. ATKINSON: He will be as I said giving a speech on September 4 which will lay out his key messages at the start of that process leading into the Annual Meetings. I don't want to scoop him on that. As you know, for the ministers there will of course be discussions on the outlook and I think that as John Lipsky and others have said recently and made clear recently, the global economy is of course improving and that's welcome, and today's U.S. GDP numbers I think support that. The outlook is improving, but we do feel that it's very important to stress that it's no time for complacency and that we expect that there are still vulnerabilities and policy support that is very important in cutting short or lessening the severity of the recession remains important. So it's a message that we do believe the recovery is in sight and is going perhaps to be a little better than we had at one time thought, but we expect a rather muted recovery. Obvious the Managing Director will have more details on that when he's talking to the ministers, and as I said, there will be some press availability around the G-20.

QUESTIONER: Exactly what you were talking now about, the signs of recovery and the last data on the U.S. GDP, could you articulate more? If I heard correctly you said something like it's important that the measures taken will be kept in place so there is no complacency. What are the main measures and efforts that the IMF believes it's important that the different governments will keep in place to assure a smooth recovery?

MS. ATKINSON: As we stressed before, the support in three areas where governments have taken measures on the financial system, the fiscal policy and monetary policy. And of course, going forward, at some point these extraordinary measures will need to be unwound and it be time to thinking about that now, but we don't believe it's quite yet time to be implementing exit strategies.I might just refer you on these issues of the recovery. You may have noticed or you may have been informed that we have begun a blog called IMF Direct, and this week John Lipsky has been and is blogging including on topics like this, so you may well be interested in seeing what he has been saying about that.I have a question online about Jamaica. It's asking, In Jamaica there are protests about what's seen as the IMF dictating cuts in government spending as a condition for a loan. Please confirm what changes are being requested.As you know, there are discussions that have been underway with the IMF and the Jamaican authorities. The authorities themselves are designing their macroeconomic program and that is something that they are very much in the lead on. I don't want to go into discussions about particular issues and I think that we've been having good discussions with the authorities. We are impressed by the fact that they are taking measures and considering measures and have committed as it is very important as we've been stressing recently to a program that will be very much their program.

Are there any other questions?

QUESTIONER: Just an agenda question. I hope I didn't miss it, but have you already started putting out an agenda or releasing documents on Istanbul for us journalists located here? Is everything going to happen there or are you going to release some report and prepare us here during the month of September?

MS. ATKINSON: Yes, all of that information will be available through Media Relations. There will be a run of certain let's say non-Istanbul-related reports such as discussing Latvia and there will be other country matters. Then the particular issues to do with Istanbul, we have a number of press availabilities and particular papers that will be released like the Managing Director's speech at the Bundesbank, and the Managing Director will also be speaking later in September on low-income countries, on September 17. Then of course there will be press availability in London and then again prior to his going to Istanbul, and in Istanbul there will be a major press conference and then various remarks that will be released.So we have a number of things, and our Media Relations Division can tell you what the timetable of those will be. Thank you all very much indeed, and I look forward to seeing you in this intensive period going forward.IMF EXTERNAL RELATIONS DEPARTMENT.

FOR CHARTS AND EQUATIONS FROM THIS STORY
http://www.imf.org/external/pubs/ft/wp/2009/wp09186.pdf

One Money, One Market—A Revised Benchmark Theo S. Eicher and Christian Henn SEPTEMBER 2009

IMF Working Paper Strategy, Policy, and Review Department One Money, One Market—A Revised Benchmark Prepared by Theo Eicher and Christian Henn1 Authorized for distribution by Thomas Dorsey September 2009 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. The introduction of the euro generated substantial interest in measuring the impact of currency unions (CUs) on trade flows. Rose’s (2000) initial estimates suggested a tripling of trade and created a literature in search of more reasonable CU effects. A recent meta-analysis of this literature shows that subsequent papers quantify CU trade impacts at 30–90 percent. However, most recent studies use shorter time series and fewer countries than Rose in his original work. We revisit Rose’s original benchmark, extend the dataset, and address Baldwin’s (2006) critiques regarding the proper specification of gravity models in large panels by simultaneously accounting for multilateral resistance and unobserved bilateral heterogeneity. This produces a robust average CU trade effect of 45 percent. Yet, the trade impacts of individual CUs vary substantially and are generally lower than those of preferential trade agreements (PTAs). Our revised benchmark can be used as a yardstick for future studies to delineate how estimates differ due to new data or differences in econometric specifications.

JEL Classification Numbers: F10, F15, C23 Keywords: Currency Unions, Preferencial Trade Agreements, Gravity Equation, Multilateral Resistance Author’s E-Mail Address: te@u.washington.edu, chenn@imf.org 1 Theo Eicher, Department of Economics, University of Washington; and Christian Henn, Strategy, Policy, and Review Department, IMF. We thank Subramanian and Wei (2007) for sharing their trade data. Christian Henn acknowledges support from the Henry Buechel Memorial Fellowship.

I.INTRODUCTION The advent of the euro awoke keen interest in whether a currency union (CU) generates trade benefits over and above those of eliminating exchange rate fluctuations. If trade relationships are costly to establish, a more durable CU commitment should yield additional trade benefits compared to a conventional fixed rate peg. It is important to quantify these trade benefits for two reasons. First, countries outside of CUs need to know how much extra gains from trade their consumers can expect in deciding whether it is worthwhile to abandon independent monetary policy and thereby possibly incur greater volatility in output and inflation (Karam et al, 2008). Second, higher trade makes a CU more resilient through more integrated business cycles among member countries. Rose (2000), in a seminal paper, was first to empirically test for a CU trade effect. He found that, on average over time, CUs double or even triple bilateral trade between members. And because the CU effects’ magnitude typically increases over time (e.g. Flam and Nordstrom, 2003), presumably trade creation would be even larger after a CU is well established. This notion of the tripling estimate being unreasonably high is further reinforced by a look at the raw trade data. For instance, since euro introduction, German-Irish trade has increased by only 30 percentage points more than German-British trade.2 Thus, it is not surprising that Rose’s estimate sparked a controversy out of which emerged an entire literature attempting to shrink the Rose effect.This literature is meta-analyzed by Rose and Stanley (2005), who report that subsequent papers find much smaller changes in trade volumes, usually around 30–90 percent. However, these recent papers used much smaller datasets over shorter time series than Rose (2000). For large panel datasets, Rose and Stanley still report trade gains exceeding 100 percent (confirmed by the latest large panel study of Frankel, 2008). Thus, recent literature shows that the CU trade effect’s magnitude has not been settled and that dataset dimensions and econometric approaches profoundly influence results. Baldwin (2006) provides a comprehensive survey of econometric approaches used in the CU literature and suggests two crucial sets of controls necessary to obtain unbiased CU trade effects from the gravity equation. Baldwin and Taglioni (2006) implement these controls in a small panel to find either negative or zero trade effects of the euro.3 Their results highlight 2 The growth rates were calculated for 1998 to 2008 from the IMF’s Direction of Trade Statistics. 3 Baldwin and Taglioni (2006) focus solely on trade effects of the euro. Hence with 4,837 observations, their dataset is much smaller than Rose’s (2000), who featured 22,948 observations, and ours (76,081 observations). Baldwin and Taglioni speculate that the implausible negative effect is the result of insufficient cross-sectional variation. However, when they add data (back to 1980) to address the high standard errors, their euro coefficient is small, positive and insignificant.

estimates’ sensitivity with respect to the suggested sets of controls, but do not resolve what the implied CU or euro impact may be in large datasets. Frankel (2008) revisits Rose (2000) in a large panel but controls only for the second of two elements in Baldwin’s critique. Here we provide a revised benchmark for CU trade effects by simultaneously addressing the key methodological issues raised by Baldwin (2006) in an updated and extended version of Rose’s (2000) large dataset. Baldwin’s (2006) first fundamental insight was that multilateral resistance (Anderson and van Wincoop, 2003) must be comprehensively accounted for. Multilateral resistance captures the notion that trade decisions are based on relative, rather than absolute, prices. Two countries’ decisions of how much to trade with each other is not only affected by the bilateral trade costs between them, but also the average (or multilateral) trade costs faced by each of these countries.4 Because multilateral trade costs are an average of bilateral trade costs, they are affected by any factors that change the latter, such as geographical location, transit connections, tariff regime etc. As many of these determinants change from year to year, multilateral resistance thus varies not only by country but also over time. Therefore time-varying country fixed effects are required to comprehensively control for multilateral resistance in panel datasets. Previous approaches to controlling for multilateral resistance have focused on geography only with a remoteness measure (Rose, 2000) or used time-invariant country fixed effects (Rose and van Wincoop, 2001).5 The latter approach acknowledges that various determinants matter for a country’s average trade cost, but also assumes that a country’s average trade costs with the rest of the world remain constant over time. Below we outline theoretically and empirically how coefficients are affected by omitted variable bias, if comprehensive multilateral resistance controls are absent from the analysis. Baldwin’s second issue is that further omitted variable bias may result when the empirical strategy does not account for unobserved determinants of bilateral trading relationships. Hummels and Levinsohn (1995) first emphasized this unobserved bilateral heterogeneity by including country-pair fixed effects in the estimation. Recent papers on currency regimes and trade that employ a similar approach include Glick and Rose (2002), Pakko and Wall (2001), Baldwin and Taglioni (2006), Klein and Shambaugh (2006) and Frankel (2008). Failure to include the adequate fixed effect controls can lead to such severe bias that Baldwin (2006) recommends ignoring any other estimates for policy purposes. While the above cited papers address either multilateral resistance or unobserved bilateral heterogeneity, only Baldwin and Taglioni address both—but, as mentioned, in a much smaller panel without overlap with 4 For instance, the distances between Australia and New Zealand, on the one hand, and Spain and Poland, on the other hand, are roughly equal. However, Australia-New Zealand trade is substantially higher than Spain-Poland trade, because average trade costs =(multilateral resistance) faced by Australia and New Zealand are quite high owing to their remote geographical location. 5 Time-varying fixed effects have since been introduced to the gravity literature, for example, in Subramanian and Wei (2007) in the context of WTO trade effects.

Rose (2000). In this paper, we implement both methodological approaches simultaneously in a long panel covering 10 cross sections over 50 years and 177 countries. In addition, we address another crucial issue that is underemphasized in the CU literature: individual CUs and preferential trade agreements (PTAs) produce widely varying trade effects as different as their member country groupings. With exception of Nitsch (2002), this heterogeneity is not addressed in the CU literature. In the presence of such heterogeneity, we show that average CU and PTA effects captured by single catch-all dummies generate biased and uninformative results. Thus, for policy purposes, there exists no single CUs trade effect; and this must be addressed by the empirical strategy. For instance, CU trade effects for the euro and the African CFA Franc are unlikely to be equal, given different average development levels of their members. Similarly, it is crucial to allow for separate effects of multilateral and unilateral (hub and spoke) CUs. Our results show that it is crucial to account for all three outlined shortcomings simultaneously to eliminate bias to CU trade effects. Rose’s (2000) average CU trade effect remains statistically and economically significant, although we find it reduced to a more realistic 45 percent. However, our results indeed confirm strong heterogeneity in PTA and CU trade effects. In contrast to Baldwin and Taglioni’s (2006) result of no euro effect, we find a statistically significant 40 percent trade increase. Furthermore, our simultaneous account of multilateral resistance and unobserved bilateral heterogeneity conveys a 100 percent trade effect of the African CFA franc. On the contrary, the multilateral East Caribbean CU is never found to have a trade effect. Hub and spoke CUs featuring the British pound and the US dollar generally do not boost trade between spokes and the hub. Thus, and in contrast to Glick and Rose (2002) and Frankel and Rose (2002), we find dollarization to be insignificant for trade (as reported by Klein, 2005). Generally, trade effects of PTAs are greater than those of CUs. The reverse is true only in Europe: There we find the euro to boost trade by 40 percent, while the EU increases trade by only 25 percent. The remainder of the paper is organized as follows. Our dataset is presented in Section 2. Section 3 reviews the Baldwin (2006) critique of gravity methodology. Sections 4 and 5, sequentially incorporate multilateral resistance and unobserved bilateral heterogeneity. Section 6 presents extensive robustness analysis. Section 7 concludes. II. DATA Our dataset is an expanded version of Subramanian and Wei (2007). Subramanian and Wei (2007) in turn base their data on Rose (2004). The dataset ranges from 1950 to 2000 and represents a significant expansion of Rose’s (2000) 1970–1990 data. Rose (2000) featured 22,948 observations (330 in CUs); we have 76,081 observations (1,224 in CUs) in 16,941 bilateral trade relationships across 177countries (see Appendix Tables A1-A2).6

The additional observations are crucial, because they enable us to introduce extensive fixed effects without compromising estimation precision. Our dependent variable is bilateral imports at five-year intervals, deflated by the U.S. consumer price index.7 A number of CU studies employ the average of imports and exports as the dependent variable, to reduce measurement error (e.g. Rose, 2000; Rose and van Wincoop, 2001; Glick and Rose, 2002). Recent approaches favor our unidirectional trade data, which is more closely aligned with theoretical implications and allows for proper multilateral resistance controls. We expand the original Subramanian and Wei (2007) dataset to include a comprehensive set of explanatory variables suggested by previous literature. First, we augment the dataset to include a large list of major PTAs obtained from Ghosh and Yamarik (2004). Second, we add information on individual CUs as reported by Glick and Rose (2002). Third, we update the CU variable to include more recent CUs. Fourth, we include a currency board (CB) dummy and split it into arrangements that peg to the US Dollar (CBusdmxt) and the D-Mark/Euro (CBeuromxt). Appendix Tables A2-A4 summarize the membership in CUs, CBs, and PTAs. Fifth is the addition of controls that are frequently encountered in the CU literature, which include current/historical colonial relationships as well as common languages/territories/ borders. Sixth, we include regressors to control for differences in factor endowments (absolute log differences in per capita GDP and population density), based on the Penn World Tables, version 6.2. Finally, we add bilateral exchange rate volatility, which is computed from the IMF International Financial Statistics using Ghosh and Yamarik’s (2004) methodology (the standard deviation of the first difference in the bilateral exchange rate in the previous 3 years). Regressions including FX volatility reduce the dimension of the dataset to 66,619 observations in 15,833 pairs starting in 1960. III. EMPIRICAL IMPLEMENTATION OF THE GRAVITY MODEL Baldwin (2006) leveled two fundamental critiques against popular empirical implementations of the gravity equation. His arguments are best understood by following a theory-based derivation of the gravity equation based on Anderson (1979) and Anderson and van Wincoop (2003). Baldwin (2006) starts with the trade expenditure share identity to derive a version of the gravity equation that relates bilateral imports, Vmxt, at time t to expenditures, E, of importers, m, and exporters, x: 6 The reason for our larger number of observations rests on the longer panel employing unidirectional trade data. 7 Deflating the trade data by the U.S. consumer price index is common in the literature, given that trade price indices are unavailable for many countries and years. Any possible bias induced is picked up by the time-varying importer and exporter fixed effects (Baldwin and Taglioni, 2006).

The numerator illustrates that size of trading partners (proxied by Em or Ex) attracts more bilateral trade, akin to Newton’s Law of Gravity. Greater bilateral trade costs, τmxt, othe other hand, reduce bilateral imports.The denominator contaimultilateral resistance terms for exporters and importers that represent these countries’ openness to the rest of the world. Formally,(EUATION)is the importer’s trade costs with k global trading partners for n varieties, while the global cost/demand index for the exporter nation is (EQUATION).Equation 1 clearly shows that both changes in bilateral trade costs (for example, countries m and x join a CU) and changes in multilateral trade costs (e.g. country k changes tariffs across the board) affect the bilateral trade relationship, Vmxt, in general equilibrium. Time-varying multilateral resistance controls are thus necessary to avoid bias. Otherwise changes in multilateral trade costs may be falsely attributed to changes in bilateral relationships (e.g., formation of a CU). Feenstra (2002) argues that time-varying fixed effects are the method of choice to control for multilateral resistance in large panels for which the relevant cost indices are unavailable. Baldwin (2006) makes the same point in a currency-union-specific context. Bilateral trade cost can be disaggregated to highlight its individual determinants:(EQUATION). (2) Aside from transport costs (proxied by distance), currency arrangements, and preferential trade agreements, trade costs are determined by a vector of regressors, Zmxt, that controls for countries’ natural inclinations to trade with each other. Variables commonly included in Zmxt are bilateral exchange rate volatility, FXvolamxt; current and historical colonial relationships, CurColonymxt and EverColonymx, respectively; common colonizer post-1945, ComColonizermx; shared official languages, ComLangmx; as well as territorial dependencies and contingencies, ComNatmx and Bordermx, respectively. It is difficult to specify an exhaustive Zmxt vector, since some bilateral characteristics may be unobservable.8 This is the origin of Baldwin’s (2006) second criticism: whenever Zmxt is not comprehensively specified, the gravity equation is immediately subject to omitted variable bias. Therefore, the gravity equation must contain not only time-varying importer and exporter fixed effects but also country-pair fixed effects, which control for all unobservables in bilateral trade relationships. The absence of pair fixed effects is not usually due to oversight on the part of the researcher. Especially in the CU literature, the paucity of 8 For example, personal relationships between business leaders, transport infrastructure, political relationships, cultural affinities, and institutional similarities.

observations entering/exiting CUs may render the introduction of these effects too restrictive in small datasets. Our dataset proves sufficiently large to provide significant results. The third methodological aspect addressed by us relates to the distinct trade effects of individual CUs and PTAs. If PTAs and CUs do not generate identical trade benefits, estimating an average coefficient using a catch-all CU or PTA dummy introduces bias not only to bilateral trade costs (Equation 2) but also to the multilateral resistance terms (Equation 1). A large literature has documented that trade effects of individual PTAs and CUs differ substantially.9 Hence, we allow not only for individual PTAs but also examine results for individual CUs. IV. MULTILATERAL RESISTANCE AND THE TRADE EFFECTS OF CURRENCY UNIONS Our empirical strategy proceeds in stages. We first introduce controls for multilateral resistance; later we then include the additional fixed effects to address unobserved bilateral heterogeneity. This sequential approach allows us to examine the marginal impact of each set of controls on the CU coefficients. Multilateral resistance controls have long been part of the CU literature. Rose (2000) included a time-invariant remoteness term to proxy for multilateral resistance. Rose and van Wincoop (2001) included country-specific fixed effects and reduced Rose’s (2000) CU trade effect from 235 percent to 136 percent in the process. The Rose and van Wincoop (2001) strategy sufficiently addresses multilateral resistance in a cross-section; however, it does not capture the time-varying nature of trade costs in panel data. Baldwin and Taglioni (2006) address this issue by including time-varying fixed effects but find either zero or negative trade effects of the Euro in a small dataset. Here we establish a new revised benchmark for a large panel by estimating equations (1) and (2) according to (EQUATION). (3) Equation (3) includes time-varying fixed effects for importers, mt(E), and exporters, xt(E), to address multilateral resistance. Note that these fixed effects absorb country-year specific regressors, such as importer and exporter expenditures, Emt and Ext, which are proxied by GDP in canonical gravity equations. Equation (3) is easily extended to account for individual CUs, CBs, and PTAs by converting β1, β2, and β3 to coefficient vectors 1-(E),2-(E), and 3-(E)representing membership in individual arrangements. 9 See Frankel (1997), Soloaga and Winters (2001), Carrere (2006), Eicher, Henn and Papageorgiou (2007), Rose (2004 and 2005), Subramanian and Wei (2007), Nitsch (2002) and Eicher and Henn (2008).

TO LOOK AT THE EQUATION IN THIS ARTICLE
http://www.imf.org/external/pubs/ft/wp/2009/wp09186.pdf

Regressions 1–3 in Table 1 present our baseline results for CU trade effects with multilateral resistance controls. Regression 1 can be directly compared to Rose’s (2000) benchmark regression except for the addition of multilateral resistance controls.10 At 0.65, the CU coefficient estimate is roughly 6 standard deviations lower than Rose’s original 1.21. This reduces the CU trade increase to 91 percent 1648.(E)as opposed to Rose’s tripling estimate (the 235 percent increase). The estimate is also significantly smaller than Rose and van Wincoop’s (2001), who did not consider the time-varying nature of multilateral resistance. Their estimate of 0.86 (implying a 136 percent increase) settles right between ours and Rose’s (2000). Regressions 2 and 3 allow for individual CU and PTA effects. Regression 2 first introduces all PTAs included in Rose’s (2000) PTA dummy; then Regression 3 expands the set of PTAs to those considered by Ghosh and Yamarik (2004). One reason put forth to exclude individual PTAs from CU studies is that CU and PTA membership may overlap, particularly in Europe (see e.g., Frankel, 2008). This overlap, however, does not justify their exclusion. Rather, by the very same reasoning, the exclusion of individual PTAs introduces omitted variable bias to CU estimates. Even if CU and PTA membership generated multicorrelation, and therefore the standard errors of PTAs and CUs were inflated, coefficients resulting from their simultaneous inclusion are nevertheless the best linear unbiased estimates. In our dataset, we find that potentially inflated standard errors are not a serious problem for statistical significance. Most of the individual CUs and PTAs are estimated with sufficient precision to infer statistical significance even when included in tandem. Regressions 2 and 3 show the importance of splitting the catch-all CU dummy into the individual CU arrangements. Individual CU trade effects differ substantially from each other and from the average trade effect estimated in Regression 1. Consequently, individual CUs improve fit considerably throughout: Convincing evidence is provided by the relevant F-Statistics, and by CU and other estimates’ robustness and significance across specifications. Large and significant effects for individual CUs exist for the African CFA and for (mostly extinct) hub-spoke arrangements represented by CUothermxt. Regressions 2 and 3 show that African CFA franc internal trade is estimated to be 197–224 percent higher than trade with outsiders. The hub-spoke arrangements of CUothermxt show a similar trade increase of 157–183 percent. CUs involving the British Pound, US dollar, and East Caribbean dollar show no statistically significant effects. 10 As outlined in the data section, further differences lie in (1) the specification of the dependent variable (unidirectional trade flow data, vs. Rose’s bidirectional), (2) time frame (1950–2000 vs. 1970–1995 in Rose), and (3) one additional regressor (we insert a currency board dummy, which has, however, no impact on the results).

The trade effect of the euro is the surprise in this set of results. In Regression 2, our estimated euro trade increase (E)is substantially smaller than effects of other CUs and the CFA in particular. Moreover, the euro effect even turns insignificant when the European Economic Area (EEA) is included (Regression 3). The formation of the EEA in 1994 extended the EU’s Common Market to most members of the European Free Trade Agreement (EFTA) and deepened European trade integration. Regressions 3 suggests that subsequent trade flows were mainly affected by PTA-based integration and hardly by the formation of the eurozone. These results underline the importance of including a comprehensive set of individual PTA dummies when estimating CU effects. A counterintuitive result in Regression 3 is negative trade creation of the main European PTA—the EU. The EU instituted far-reaching integration by removing border controls and harmonizing the entire spectrum of public policy; the resulting reduction in transaction costs should have augmented trade volumes. This predicted negative EU effect, however, is well understood in the literature (see e.g., Linnemann, 1966; Aitken, 1973; Pollak, 1996; Rose, 2004; Baldwin 2006). Dating back to Linnemann (1966), the gravity equation has been known to systematically over-predict trade among large, geographically proximate country pairs. Europe-specific variables thus tend to pick up the negative residuals resulting from proximate European countries’ under-trading relative to gravity model predictions. Since the EU variable most closely resembles a Europe dummy, its coefficient turns negative in Regressions 2 and 3. This negative coefficient indicates the omission of crucial variables that would help the gravity equation predict intra-European trade correctly. This omission is not surprising: because the flaw in the gravity specification relates to unobserved effects specific to country pairs, multilateral resistance controls cannot remedy the issue. That is, the negative EU effect alerts us that the empirical approach is missing crucial unobserved bilateral heterogeneity controls. We add these controls in Section 5. V. BENCHMARK CU TRADE EFFECTS ADDRESSING MULTILATERAL RESISTANCE AND UNOBSERVED BILATERAL HETEROGENEITY In this section, we add country-pair fixed effects to control for any relevant unobservables in bilateral trade relationships. The estimates presented in this section thus account for the most comprehensive set of controls for omitted variable bias and are the most policy relevant. As outlined in the introduction, either multilateral or unobserved heterogeneity among trading partners has been addressed by previous CU papers. Here we account for both effects simultaneously to provide a revised benchmark of Rose’s (2000) results. In a CU context, only Baldwin and Taglioni (2006) have undertaken such a simultaneous approach before—on a small dataset of roughly 4,000 recent observations (that does not overlap with Rose, 2000). The size of the dataset matters because the inclusion of comprehensive fixed effects reduces the number of degrees of freedom substantially. By adding country-pair fixed effects to equation (3), we obtain our new estimation equation:(E)

All time-invariant pair specific variables are now absorbed into the pair fixed effects, αmx. In large trade datasets, the estimation of three-way fixed effect structures as in equation (4) is computationally demanding.11 Despite the growing interest of labor economists in analyzing three-way error component models since Abowd et al. (1999), only three papers exploit this setup in a gravity context aside from Baldwin and Taglioni (2006). Baltagi et al. (2003) also provide strong economic and statistical arguments in favor of our proposed three-way error components model. They do not motivate the time-varying importer and exporter dummies with omitted price terms but with country-specific political and institutional conditions, and business cycles. Eicher and Henn (2007) exploit the methodology in a large dataset to test for the trade implications of regionalism and multilateralism. Baier and Bergstrand (2007) chose the three-way structure as their preferred technique to address possible endogeneity problems. Regressions 4–6 in Table 2 present the estimates based on equation (4). The F-Statistics overwhelmingly confirm the importance of country-pair fixed effects. Moreover, Regression 4 already reveals that we previously attributed much of naturally occurring trade to CUs. At 53 percent(E), the average CU effect has about halved and differs by more than two standard deviations from our previous estimate of 91 percent (Regression 1). The 53 percent estimate is statistically significant but dramatically lower than the 120 percent reported by Glick and Rose (2002, Table 5). Their paper features country-pair fixed effects but no time-varying multilateral resistance controls. By disaggregating CUs and PTAs in Regressions 5 and 6, we find that individual CU estimates are significantly reduced compared to Regressions 2 and 3. The exception is again the trade effect of the euro. It turns positive now after accounting for unobserved bilateral heterogeneity and will be discussed further below. Again we show that catch-all dummies masked highly heterogeneous individual CU and PTA effects. The estimates for hub-spoke CUs involving the British Pound or U.S. Dollar remain insignificant. The African CFA and Other (extinct) hub-spoke CUs, on the other hand, stay significant but show reduced trade impact. In percentage terms, their effects halve to 97 and 73 percent, respectively. Overall, the country-pair fixed effects cause a slight reduction in estimates’ precision, because Regressions 4–6 exploit only the time dimension. That is, the CU coefficients in Regressions 11 This is due to the number of fixed effects being large in all dimensions and that the panel is unbalanced. We use the FEiLSDVj estimation procedure of Andrews et al. (2006), which is based on partitioned regression techniques. We are thus forced to create and store 2000+ time-varying importer and exporter dummies (with 76,089 observations each) before algebraically stripping out the country-pair fixed effects.

4–6 reveal exclusively the time-series impact of CU accessions and exits and thus constitute the policy relevant measure we seek. The euro is the only CU for which trade effects become both larger and more significant when we add unobserved bilateral heterogeneity controls. This supports Baldwin’s (2006) hypothesis that non-euro CUs carry essentially zero informational content for euro trade effects, because these CUs’ members differ dramatically from eurozone countries. Our preferred regression 6 shows that the euro increased trade by about 40 percent 134.(E). This result contrasts with Balwin and Taglioni (2006), who only find negative or zero trade effects of the eurozone. The magnitude of our preferred euro estimate is comparable to those of Barr et al. (2003) and Bun and Klaassen’s (2002) long-run estimates. However, our estimate is higher than those of Micco et al. (2003), Flam and Nordstrom (2003) and Bun and Klaassen (2007) who use drastically shorter panels covering fewer countries. Except for Flam and Nordstrom (2003), none of the cited studies control for pair heterogeneity and multilateral resistance. As expected, country-pair fixed effects also provide a remedy for the negative EU effect, because they allow to correctly predict natural trade levels in Europe. Therefore, the EU dummy can now reflect a 25 percent(E)increase in trade. Furthermore, the EEA trade effect is about 57 percent(E).(E). While, at 40 percent, the CU effect is smaller than the PTA trade effect for the eurozone, the combined effects of European integration (CU and PTA) caused a substantial trade increase during the 1990s. Outside of Europe, however, PTA effects are generally larger and more precisely estimated than those of CUs covering similar countries. It is notable that FX volatility shows no significant impact on trade throughout. Currency boards are significant when aggregated (Regression 4) but insignificant when disaggregated (Regressions 5 and 6). This may be due to an insufficient number of observations in the presence of multiple fixed effects. These fragile FX volatility and currency board effects are in line with the recent empirical literature on the subject (see, e.g. Clark et al., 2004). Furthermore, theoretical literature also indicates that FX volatility may generate ambiguous trade effects in general equilibrium (Bacchetta and van Wincoop, 2000). Remaining control variables for geography, culture, and colonial history are stable, significant and of the expected magnitudes. VI. SENSITIVITY ANALYSIS It is common in the CU literature to provide extensive sensitivity analysis to explore a range of alternative specifications. Through five perturbations to our preferred regressions, our sensitivity analysis covers virtually all remaining variables proposed by earlier literature.12 12 All other previously suggested variables are already included in our analysis (absorbed into the fixed effects).

Our first perturbation follows Rose (2005) and adds regressors for membership in the three international organizations intended to promote trade: GATT/WTO, IMF and OEEC/OECD.13 Our second perturbation adds two measures of factor endowment differences from Frankel et al. (1995) to proxy for Heckscher-Ohlin trade. These two measures are the absolute log differences in per capita GDP and population density. In the third and fourth perturbations, we drop FX volatility and the CB variables. The omission oFX volatility extends our dataset to back to 1950 and increases the number of observations by roughly ten thousand. Finally, our fifth perturbation adopts a broader CU definition (aGlick and Rose, 2002), which defines trade flows between spokes in hub-spoke arrangemenalso as CU-inTable 2 presents the robustness results for the aggregate CU effect with and without additional unobserved bilateral heterogeneity controls. All regressions expand on the baseline Regressions 1 and 4 but include the entire disaggregated set of individual PTAs. The implied trade increases are 42–47 percent for our preferred specification and 117–135 percent for the version without unobserved bilateral heterogeneity controls. Our preferred estimate of the average CU effect thus remains unambiguously on the order of 45 percent. Table 3 presents robustness for the individual CU effects. To conserve space, it focuses exclusively on our preferred specification with simultaneous multilateral resistance and unobserved bilateral heterogeneity controls. That is, all results in Table 3 are direct variants of Regression 6. Like their aggregate CU counterpart in Table 2, individual CU impacts are concentrated in narrow intervals. The CFA franc is estimated between 96 and 123 percent, slightly skewed around our 97 percent benchmark. Interestingly, the CFA coefficient rises in both magnitude and significance when we control for factor endowment differences (which our results find to increase bilateral trade). The euro trade effect also remains robust at 34–40 percent. Likewise, British Pound and other/extinct CUs’ effects hardly change. Our conclusion that dollarization does not improve trading relations with the United States also remains intact. The US Dollar CU impacts remain negative and even turn statistically significant in some specifications. VII. CONCLUSION Rose (2000) provided provocative estimates of the trade effects of currency unions, suggesting a tripling of trade. The subsequent literature finds smaller effects but differs from Rose’s original study either in methodology or in the size of the panel. Smaller panels that cover recent CU trade effects produce significantly smaller estimates, while larger panel 13 GATT = General Agreement on Tariffs and Trade, WTO = World Trade Organization, IMF = International Monetary Fund, OEEC = Organization for European Economic Co-operation, OECD = Organization for Economic Co-operation and Development. Data on GATT/WTO membership is taken from Subramanian and Wei (2007). Data on IMF and OEEC/OECD membership is taken from these institutions’ websites at www.imf.org and www.oecd.org, respectively.

studies still find large trade effects. These large panel studies are, however, subject to Baldwin’s 2006 critique that global trade and general equilibrium considerations (multilateral resistance) as well as country pair specific characteristics (unobserved bilateral heterogeneity) should be accounted for comprehensively and simultaneously to prevent omitted variable bias. We provide an updated benchmark of the original Rose (2000) and Glick and Rose (2002) results, using an expanded dataset and simultaneous controls for multilateral resistance and unobserved bilateral heterogeneity. Three main results emerge: first, these simultaneous controls reduce the magnitudes but not the significance of CU trade effects. Yet, individual CUs may still generate trade effects exceeding 100 percent. The euro trade effect is, however, significantly smaller than the estimates for developing country CUs. Second, we show that a comprehensive set of PTA dummies should be included in any CU estimation, because individual PTAs exert strong and heterogeneous impacts on trade. Omission of their individual effects would thus introduce substantial omitted variable bias. Third, trade effects of PTAs seem to generally outpace those of currency unions. This, however, may result from the member country composition of particular CUs and PTAs.

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