Raghuram Rajan, India’s central banker, has been saying loudly that the Federal Reserve, the European Central Bank and the Bank of Japan need to take more notice of the impact their unconventional monetary policies have on emerging markets.
“My call is to rethink the international rules of the game,” Rajan said in April at the Hutchins Center on Fiscal and Monetary Policy at Brookings, calling for more attention to “spillover effects” from such policies as the Fed’s decision to buy trillions of dollars worth of U.S. Treasury bonds, known as “quantitative easing.” He said such policies had triggered a flood of money into emerging markets, pushing up their currencies and sparking asset bubbles.
At that event, Ben Bernanke, the former Fed chairman and now a distinguished senior fellow at Brookings, noted Rajan’s skepticism about the efficacy of quantitative easing as a monetary tool, challenged it on the basis of the recent experience in the U.S. and said that “emerging markets are better probably better off than if these policies [were] not being used.”
Rajan has continued to press his case, most recently in a speech in Tokyo in late May.
Now it’s ECB President Mario Draghi’s turn. At a press conference on June 5—which was dominated by details of the ECB’s moves to get inflation up towards its taget—a Turkish reporter asked how the ECB takes into account the effect its latest efforts will have on emerging markets.
“You know it's an issue that comes out each time the central bank of a large jurisdiction takes a monetary policy action, namely the spill-overs for emerging markets,” Draghi said.
“The first thing is to say that it's very difficult today to conceive a structured cooperation framework for the central banks, because each central bank is bound by its national mandate, which for us is price stability,” he said.
Draghi did advocate “more exchange of information,” adding that “central banks of all countries are actually working actively” to this end. But he reminded emerging-market governments that those economies hit hardest when the Fed began to talk of scaling back its bond-buying were the ones that had pursued policies that left them vulnerable. “It's not coincidental that the last time we had a big spill-over coming from a monetary policy decision of one large jurisdiction, not us, the most affected emerging market countries were also the countries the fundamentals of which were the weakest,” Draghi said.
He also pointed to the International Monetary Fund, and its role in cushioning emerging-market economies from the tidal waves unleashed by big-economy central banks. “The other actor, [a] very important actor, is the IMF, which is the only institution that can actually put in place a facility that could help emerging market economies to cope with transient but very significant spill-overs.” The IMF has offered strong a members a line of credit—the Flexible Credit Facility—but only Mexico, Colombia and Poland have signed up. “There are other considerations that prevent some countries from accessing that facility or the IMF directly, which makes it difficult for them to do so. So work is ongoing on that front as well,” Draghi said.
Over to you, Rajan.