Globalization

Spillovers, spillbacks and policy coordination

Reserve Bank of India Governor Raghuram Rajan’s recent plea for increased coordination is merely the latest protest by emerging-market economy (EME) policymakers about the spillovers from advanced-economy (AE) monetary policy. Such complaints have been common since AE central banks first implemented unconventional policies in 2008. The most famous was Brazilian Finance Minister Guido Mantega’s September 2010 remark that “We’re in the midst of an international currency war.

The targets of these comments—policymakers in Europe, Japan and the United States—responded that the world would be better off if their economies grew. A deeper recession in the advanced world was surely in no one’s interest. Extraordinary monetary policy easing was therefore justified by both domestic and global concerns. U.S. and European policymakers further defended their actions by saying that their mandate was to promote price stability and sustainable growth domestically, which required taking account of the external impact of their policies only insofar as they then fed back onto their own economies. That is, while spillovers per se were not their responsibility, spillbacks were.

Debates over the potential benefits from international policy coordination have a long history...

 

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It's a small world (after all)

Originally built for the 1964 New York World’s Fair, the “It’s a small world” exhibition re-opened at Disneyland two years later in 1966. At the time, the international monetary system was characterized by fixed exchange rates and widespread capital controls.

A half century later, global finance has been transformed so that exchange rates are now mostly flexible and cross-border capital mobility is generally high. As they say in Disneyland, it’s a small world after all...

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