You can´t be a monetary hegemon and then duck responsibility. Or can you?

Some arguments:

Dani Rodrik

From Istanbul to Brasilia to Mumbai comes a crescendo of complaints about dollar imperialism. Heads of state and central bank governors allege that the policies of central banks in industrial countries, especially the U.S. Federal Reserve, pursued in self-interest, are wreaking havoc in emerging-market economies. This allegation is mostly unfair. Emerging markets aren’t hapless and undeserved victims; for the most part they are simply reaping what they sowed.

Frances Ford Coppola

The Fed’s decision to taper its large-scale asset purchases is causing turmoil in emerging markets. But neither the Fed nor the US Treasury seem remotely concerned. The FOMC’s latest decision to continue the taper at $10bn per month makes no mention of anything other than US domestic conditions. And Jack Lew, the Treasury Secretary, suggests that problems in emerging market are more down to bad policy on their part than anything the Fed is doing.

The solution to this is obvious. The Fed should not be “going it alone” on monetary policy decisions of this magnitude. The US benefited from the agreement of the G20 to QE, and it continues to benefit from the reserve currency status of the dollar. With the “exorbitant privilege” that reserve currency status grants goes exorbitant responsibility. Fed policy should no longer simply be determined by US domestic conditions. It must take into account the state of the global economy. The Fed is in effect the central bank of the world. It is time it behaved like it.

Paul Krugman

The larger point is that Turkey isn’t really the problem; neither are South Africa, Russia, Hungary, India, and whoever else is getting hit right now. The real problem is that the world’s wealthy economies — the United States, the euro area, and smaller players, too — have failed to deal with their own underlying weaknesses.

So Turkey seems to be in serious trouble — and China, a vastly bigger player, is looking a bit shaky, too. But what makes these troubles scary is the underlying weakness of Western economies, a weakness made much worse by really, really bad policies.

The chart indicates that the “taper talk” which began last May had a “stopping effect” on advanced economies stock markets (although a much smaller effect on the US markets itself).


The next chart shows the impact on the exchange rate to the dollar of different countries. Given that Japan´s exchange rate stopped depreciating with the “taper talk”, we may surmise that the depreciation observed in the other countries was also “deflationary”.




This quote from Tim Duy is pertinent in this regard:

Funny thing is that what the Fed sees as no tightening is evolving into a global tightening now as central banks rush to raise rates.  Consequently, money surges into the global safe asset – US Treasuries.  And, interestingly, I think that you can argue that this is much, much more disconcerting than last year’s taper tantrum.  This seems to me to be a pretty clear global disinflationary shock.  And it isn’t like inflation was on a runaway train to begin with.

9 thoughts on “You can´t be a monetary hegemon and then duck responsibility. Or can you?

  1. The econo-voodoo of the inflation-hysterics is seen in current Fed policy. The Fed will not engage in QE one moment longer than the bare minimum necessary to avoid outright deflation and recession. I am sorry to say it,but I fear Yellen has bought into a very regressive policy of tightening, when no tightening is needed, and in fact may injure the global economy.

    And I doubt Yellen will want to suddenly reverse policy in her early months on the job. This looks bad, folks.

    Tim Duy is correct,David Beckworth is correct, and Marcus Nunes, as always, points us in the right directions.

    With the PCE deflator sinking below 1 percent, what is the rationale for tightening now (and if one looks at inflation for the last fit years, the Fed was tight already)?

    The U.S. Federal Reserve of Japan?

  2. Just as I was getting comfortable that the Fed would at least pull us out of the trough of misery, I had to go talking about recovery and moving on… Sorry, guys. I must have jinxed the global economy with such talk. 😦

  3. Evading responsibility is pretty second nature to most central banks. Narrow inflation targeting central banks evade responsibility all the time.
    That is the other good thing about NGDLT — it forces central banks to be accountable for the aggregate demand effects they actually have.

    • Lorenzo, back in the 80s NGDP targeting was widely discussed. Unfortunately, by pure chance, because the New Zealand PM was asking all the agencies to establish goals, the only thing that came to mind to the CB President was “IT”). One of those unfortunate “accidents of history”!

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