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...
Some forecasters are confidently predicting a large further rise in the U.S. dollar against key currencies like the euro and the yen. And a few ominously warn of impending currency wars where central banks outside the United States will manipulate their currencies to gain a global trade advantage.
Not so fast. First, currency forecasting is a hazardous business. And second, even if (as widely projected) the dollar were to rise substantially, its appreciation would seem consistent with relative growth prospects, not currency management by policymakers.
In September 2010, Brazil’s former finance minister, Guido Mantega, made headlines when he accused the Federal Reserve, the European Central Bank and the Bank of England of engaging in a currency war. The complaint was that easy monetary policy was driving down the value of the dollar, the euro and the pound, at the expense of his country and those like it. More recently, similar charges have been levied against Japan: namely, that the Bank of Japan’s extraordinary balance sheet expansion is aimed at driving down the value of the yen, damaging the country’s trading partners and competitors...
