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Fed Chair Bernanke: simultaneous accommodative policy can benefit all nations.

When many nations with advanced economies simultaneously maintain accommodative monetary policies, as is the case today, it generally is mutually beneficial to all nations, Federal Reserve Chairman Ben Bernanke said March 25 during a speech in London.

Bernanke addressed the question of whether accommodative monetary policies can constitute "competitive devaluations." In other words, are those advanced nations trying to lower the value of their currencies in order to spur their own exports and possibly gain economically at the expense of other nations? That situation is not taking place, Bernanke said, noting no large and persistent shifts in exchange rate dynamics in the past few years.

A rising tide lifts all economies

"The benefits of monetary accommodation in the advanced economies are not created in any significant way by changes in exchange rates; they come instead from the support for domestic aggregate demand in each country or region," the Fed chairman remarked during his speech at the London School of Economics. "Moreover, because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not 'beggar-thy-neighbor' but rather are positive-sum, 'enrich-thy-neighbor' actions."

This exercise is not simply an academic one, he explained. The distinction between monetary policies meant to support domestic objectives, on the one hand, and exchange rate devaluations or other protectionist measures meant to divert trade, on the other, is critical, Bernanke pointed out. "The former can be mutually beneficial," he said. "The latter are not."

Situation with emerging markets more complicated

Bernanke acknowledged that the interplay of policies can be more complicated among advanced economies and emerging-market economies. Lower interest rates in developed nations could cause emerging-market currencies to appreciate, harming their exports. Second, emerging-market economies may perceive themselves to be vulnerable to asset bubbles and financial imbalances caused by heavy and volatile capital inflows, including those arising from low interest rates in the advanced economies.

But Bernanke noted that trade-weighted real exchange rates of emerging market economies have remained largely unchanged since the onset of the financial crisis in 2008. And even if low rates in major countries did lead to big currency appreciations in emerging markets, the harm to their global competitiveness would have to be weighed against the benefits of stronger demand from advanced economies. Federal Reserve models, Bernanke said, suggest that those effects are roughly offsetting. Thus, accommodative policies in major industrial countries do not appear, on balance, to damage output and exports in the emerging-market economies.

"In fact," Bernanke concluded, "the simultaneous use by several countries of accommodative policy can be mutually reinforcing to the benefit of all."

April 3, 2013

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Publication:Financial Update
Date:Apr 1, 2013
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