Brazil's finance minister, Guido Mantega, has been sharply critical of the Federal Reserve's latest round of quantitative easing, calling it "protectionist" and warning that it could spark a currency war. José Antonio Ocampo, former United Nations Under-Secretary-General for Economic and Social Affairs and former Finance Minister of Colombia, is reluctant to pick a side. Writing at Project Syndicate, Ocampo argues that "both sides are right":
In particular, expansionary monetary policies in the US (indeed, in all advanced countries) are generating high risks for emerging economies. Because interest rates must remain very low in developed countries at least for the next several years, there are now strong incentives to export capital to higher-yielding emerging economies. But such capital inflows threaten exchange-rate overvaluation, rising current-account deficits, and asset-price bubbles, all of which have in the past led to crises in these economies.
In short, the medium-term benefits that emerging economies could receive from faster growth in the US are now being swamped by short-term risks generated by the “capital tsunami,” as Brazilian President Dilma Rousseff has called it.
The basic problem is the lack of a broader agenda that would make the Fed’s position consistent with that of Mantega and other emerging-country officials. That agenda must include two issues of global monetary reform that remain unaddressed: coordinated global regulation of capital flows in the short term, and a long-term shift toward a new international monetary system based on a true global reserve currency (possibly based on the International Monetary Fund’s Special Drawing Rights).
The US could benefit from such policies, as capital-account regulation would force investors to find opportunities at home, while a true global reserve currency would free the US from concerns – and harsh rebukes – about the implications of its monetary policy on the global economy. At the same time, emerging markets would gain the full benefits of expansionary monetary policy in the US, to the extent that it boosts demand for their exports.
Read The Federal Reserve and the Currency Wars here.
10-03-2012 7:11 AM
Filed under: Quantitative Easing, monetary policy, ben bernanke, finance, Brazil, Fed, project syndicate, currency wars, federal reserve bank, capital exchange, capital inflows, Guido Mantega, José Antonio Ocampo