Tags: QE | guidance | Meltzer | IMF

Expert Panel Looks at International Effects of QE

By    |   Wednesday, 15 Jan 2014 06:38 AM

The House Financial Services Committee's Subcommittee on Monetary Policy and Trade, chaired by the retiring Rep. John Campbell, R-Calif., held a hearing Jan. 9 titled "International Impacts of the Federal Reserve's Quantitative Easing (QE) Program."

The hearing featured four experts from academe and think tanks who looked at the effects of official guidance and market rumors regarding prospective tapering of QE on international capital flows. This is supposed to be part of an extended study of the Fed marking the 100th anniversary of its founding in 1914.

In his opening statement, Campbell said that heretofore, discussion of the benefits and risks of QE had focused almost entirely on domestic issues, but this hearing would be different.

Benn Steil, a senior fellow and director of international economics at the Council on Foreign Relations, testified that the effect of QE in pushing down the yields of safe assets and pushing investors into riskier assets had its greatest effect in the currencies and bond markets of emerging growth countries running high current account deficits. Ironically, some of the measures countries might take to respond might be classified technically as currency manipulation.

Steil criticized the Fed for giving guidance as to when QE might be withdrawn based on a date in 2015, then only a month later, switching to guidance based on unemployment data. He pointed to Chile as a country that had adopted effective counter measures in advance of crisis conditions.

Allan Meltzer, a political economics professor at Carnegie Mellon, emphasized that the objective of policy should be to achieve long-term stability.

He suggested that rather than acting unilaterally, central banks should work together to adopt rules that would promote global financial stability. He listed six simple rules that should be adopted by the leading industrial countries to bring this about: 1) an inflation target of 0 to 2 percent; 2) any country could peg its currency to those of other participating countries; 3) a group of countries would benefit by floating their currencies together; 4) no country would be required to join the system; 5) the system would introduce discipline into international monetary policy; and 6) countries would be free to suspend the system.

Meltzer stressed that the stability of the global financial system will be tested whenever the $4.5 trillion now sitting on bank and corporate balance sheets is deployed, potentially threatening the stability of countries that receive it in ways that are unknown, since this is unchartered territory.

Finally, Meltzer would halt International Monetary Fund (IMF) lending to countries like France, Ukraine and Iran and warned that the United States would end up paying for this.

Desmond Lachman, a resident fellow at the American Enterprise Institute, stated that U.S. monetary policy usually has spillover effects in international markets, and QE is no exception. He warned that the European Union appears to have become complacent regarding its ability to manage its sovereign debt crisis, but this is not over.

Lachman sees risks in either a too slow or too rapid withdrawal of QE and from changes in growth outlooks of individual countries whose policies are out of synch with those of the European Union and the European Central Bank.

Arvind Subramanian, a senior fellow at the Center for Global Development and the Democrat witness, was more sanguine than the others were as to the ability of countries to employ appropriate tools to cope with whatever changes in capital flows might occur. He called for inclusion of additional funding for the IMF and World Bank in the pending omnibus appropriations bill, and he insisted that there is still a role for development funding.

(Archived video and the staff memorandum can be found here.)

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Robert-Feinberg
The House Financial Services Committee's Subcommittee on Monetary Policy and Trade, chaired by the retiring Rep. John Campbell, R-Calif., held a hearing Jan. 9 titled "International Impacts of the Federal Reserve's Quantitative Easing (QE) Program."
QE,guidance,Meltzer,IMF
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2014-38-15
Wednesday, 15 Jan 2014 06:38 AM
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