International Monetary System Ill-Equipped to Handle Global Problems, Asian Economists Say

IMF News, October 7, 2016

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The international monetary system may be ill-equipped to deal with modern global problems including climate change and abrupt shifts in cross-border capital flows.
There is “no global safeguard mechanism for managing cross-border spillover impacts” when major central banks like the Federal Reserve shift monetary policies (Duvvuri Subbarao).
Duvvuri Subbarao (Governor of the Reserve Bank of India from 2008 to 2013) recalled that Fed easing caused capital to rush into India and then, when the Fed signaled removal of accommodation in 2013, capital rushed out again, causing a 17 percent drop in the Indian currency in the course of four months.
Participants emphasized the asymmetric global impact when major central banks diverge in policy (e.g., Fed tightening while the European Central Bank eases).

Eisuke Sakakibara highlighted damage to emerging markets (including Russia and Brazil) from declines in oil and commodity prices.
Sakakibara referenced the World Economic Outlook finding that global growth will remain subdued and warned that persistent stagnation could provoke more populist calls for restrictions on trade and immigration, which would further hamper productivity, growth, and innovation.
Sakakibara: “I am very much afraid that what Larry Summers called the period of secular stagnation may have started in the world economy.’’ He urged that “International financial organizations need to take some measures to rectify the current very serious situation.’’

Andrew Sheng argued that the international monetary and financial system was designed without consideration of climate change or income inequality.
With major central banks’ policy rates “near zero or negative,” Sheng said “global income and wealth inequality are getting bigger and bigger,’’ and that “It’s an issue that monetary policy needs to consider.’’
Sheng called for global action to mobilize capital to fight climate change and mitigate the impact of growing inequality.

Panelists urged major central banks, particularly the Federal Reserve, to pay more attention to the global effects of their monetary policies and the resulting financial flows on less highly-developed nations.
Perry Warjiyo (deputy governor of Bank Indonesia): “The divergence in monetary policies in the advanced countries has a huge impact on the emerging economies. At some point we have to cope with these very volatile capital flows.’’
Subbarao proposed an international body to evaluate central bank actions and determine whether domestic benefits outweigh impacts on other nations, and suggested rules or mechanisms “for sharing the burden of adjustment to such policies.’’
Barry Eichengreen expressed skepticism about the feasibility of continuous, meaningful monetary policy coordination, noting the Fed’s domestic mandate: “The world in which we live is one in which every country has to get its own monetary house in order.’’ He viewed the IMF and regional arrangements as useful information-sharing devices but questioned deeper coordination.

Barry Eichengreen observed that, from a headline perspective, the global financial safety net “looks pretty good’’ with resources having grown compared with liabilities, but noted a persistent stigma attached to seeking IMF assistance, typically used only in crisis.
Panelists recommended making crisis-era bilateral swap arrangements permanent and noted that swap lines could be broadened to include more countries, potentially by conducting them via the IMF.

International Monetary Fund