Has Monetary Cooperation Broken Down?
When Governor Raghuram Rajan of the Reserve Bank of India, an acknowledged international monetary heavyweight, speaks he makes news. Often he delivers a well-deserved wake-up call. Unfortunately, on January 31, speaking to Bloomberg and as reported in the Financial Times, he sounded the wrong alarm in declaring that international monetary cooperation has broken down and implicitly blaming the difficulties facing a number of emerging market countries on that breakdown. Governor Rajan did a disservice to international monetary cooperation in three respects.
First, he declared that, during the dark days of the global financial crisis in 2008–09, the emerging market and developing countries stimulated their economies through the application of monetary and fiscal policies in order to do their part to support global growth. It is true that many of these countries adopted expansionary policies. It is not true that they did so primarily out of a desire to help the advanced countries. Their principal motivation was to counteract the effects of the global slowdown on their own economies. In the three years before the global financial crisis (2005–07), growth in the emerging market and developing countries averaged 8.1 percent, on a purchasing power basis. During the crisis years (2008–09), growth slowed to 4.5 percent. And it has averaged 5.8 over the past four years (2010–13), not hitting the precrisis average in any year. Emerging market and developing countries adopted the right policies in 2008–09 in their own interests. In doing so, they participated in a cooperative global effort.
Second, Governor Rajan argued that the adoption of a second round of quantitative easing in 2010 by the Federal Reserve, and subsequent similar actions by other central banks, were motivated solely by self-interest without regard for or communication with the authorities in other countries. Governor Rajan knows better. He knows that in 2010 the Federal Reserve's plans were widely discussed at the annual Economic Policy Symposium in Jackson Hole, at the Bank for International Settlements in Basel, and by the G-20 finance ministers and central bank governors meeting in Korea before the policy change was announced.
More seriously, Governor Rajan failed to answer his own explicit and implicit questions: What should the Federal Reserve and other central banks and governments of advanced countries have done differently? Did those policy actions damage the global economy as a whole, which is not the same as inconveniencing a few countries? By omitting any constructive suggestions, he has effectively contributed to international monetary non-cooperation.
Third, Governor Rajan argued that the Federal Reserve has acted selfishly, in the interests of the US economy alone but not those of the world economy, first, in signaling in May and June of 2013 that the third round of quantitative easing would likely come to an end (taper off) and, second, in adopting such a policy in December 2013. Governor Rajan implied that his Federal Reserve counterparts told him bluntly: We will do what we need to do, what you do is your business, and you should let markets and prices adjust. I doubt this is the case, based on what would be the normal practice of communication among central bankers. On this point, he again failed to articulate what would have been a better and more cooperative Federal Reserve policy over the past year that would have benefitted both the United States and the global economy.
The lessons I draw from Governor Rajan's remarks are three:
- No country adopts policies that are not in its own self-interest, properly calibrated to consider long-run as well as immediate effects.
- International monetary cooperation is not promoted by finger-pointing and name calling, in particular using the media as a sounding board.1
- Responsible and well-informed officials can have honest differences about the effects and, therefore, the desirability of different policies. They need to work harder to identify and understand those differences. That is the heavy lifting in international monetary cooperation: problem identification and shared diagnosis.
1. I am not arguing that the US record on meaningful international monetary cooperation is spotless. In "A Dark Day for International Cooperation," Real Time Economic Issues Watch (January 16, 2014), I argued forcefully that the US government had let down the world by failing to include the IMF reform legislation in the omnibus appropriations legislation.