Global financial stability is at risk as central banks draw back from ultra-easy policies that have flooded the world with cash, because emerging markets lack defenses to prevent potentially huge capital outflows, top officials were warned on Saturday.
Central bankers from around the world, devoting the second day at their annual Jackson Hole policy retreat to the threats posed by global liquidity, heard two academic papers on the challenges, sparking a debate on actions and on coordination.
Bank of Japan Governor Haruhiko Kuroda told the audience, which included top officials from advanced as well as emerging economies, that the bold measures he had championed to spur his nation's moribund economy were bearing fruit.
"The bank's (policy) has already started to exert its intended effects," Kuroda said. The Bank of Japan has embarked on an aggressive bond-buying campaign to lift inflation in his country to 2 percent.
Easy money policies used to depress interest rates in Japan, Europe and the United States had sparked a flood of capital into emerging markets as investors sought higher returns.
Now, however, the U.S. Federal Reserve has said it plans to reduce its bond-buying stimulus by year end, with an eye toward drawing it to a close by mid-2014.
That has sparked an exodus of cash from emerging markets, including India and Brazil, whose currencies and stock markets suffered steep losses this week.
"Amplifications, feedback loops and sensitivity to risk perceptions will complicate the task of exit and necessitate very close and constant dialogue and cooperation between central banks," Jean-Pierre Landau, a former deputy governor of the Bank of France, warned in his presentation.
Turkish Central Bank Governor Erdem Basci attended the conference, but his Brazilian counterpart, Alexandre Tombini, canceled in order to stay home and deal with the crisis.
Tombini was replaced in Jackson Hole by his deputy, Luiz Pereira, who argued that a tapering of the Fed's bond purchases might actually be a net benefit for emerging economies if it signaled that the U.S. economy was picking up steam. A stronger United States should spell stronger demand for exports from emerging economies, including Brazil.
Landau argued that central banks in advanced economies had cooperated successfully during the 2007-2009 financial crisis, when they coordinated on interest rates cuts and set up currency swap lines. As a result, they could do so again in the future with an eye toward moderating the spillovers from their actions.
But, he acknowledged it would be difficult to get agreement to subordinate national priorities in advance, a point echoed by others.
"How much should domestic monetary policy restrain itself for the stability of global (conditions)?" asked Allan Meltzer, a Fed historian and professor at Carnegie Mellon University. "That's a fundamental problem for monetary policy."
There was also discussion about the need for emerging market nations to develop tools to control credit flows. Without such tools, these countries could lose the ability to control domestic financial conditions with monetary policy.
But Terrence Checki of the New York Fed cautioned that monetary policy may not be the best way to deal with financial excesses, and others said domestic priorities should not be subordinated to international obligations.
Don Kohn, a former Fed Vice Chairman and a candidate for the top job when Fed Chair Ben Bernanke's term ends in January, countered the claim that monetary policy might be too loose globally, citing elevated jobless rates in rich countries.
"One of the ways that monetary policy of the United States was transmitted was by resistance to exchange rate appreciation in other countries," he said, voicing a familiar Fed argument that emerging economies could better absorb easy U.S. policy if they allowed their own exchange rates to fluctuate.