Officials at the Federal Reserve - but not just exclusively the Fed – did an admirable job of chucking out the rule book and thinking in unconventional terms in confronting a historic crisis and averting what could have been a disastrous outcome. One might argue that each successive wave of unconventional policy probably has less marginal positive impact, in the sense that it is diminishing returns on each successive wave, but in aggregate and concept it was certainly the right thing to do. IMF Managing Director Christine Lagarde gave a speech at Jackson Hole [in August] in which she offered a pretty favourable review of uncoventional monetary policy and I tend to agree with her.
Some countries have not adequately prepared for the withdrawal of unconventional monetary policy. It was always meant to be temporary. It was never meant to be sustained over a long period of time, and I would argue that it should not be sustained over a long period. It is not a permanent phenomenon – it is a bridge to normalcy. Those countries that understood that it was temporary, that anticipated eventual withdrawal and pursued strong fundamentals - Mexico for example - are less dependent on this shot of liquidity than other countries that seem to have been caught a little more flat-footed and not have prepared as aggressively. In some countries, certainly there was a sense of complacency. But others were much more aggressive in seeing through this as a temporary phenomenon.
The markets were telling us, when certain currencies depreciated during the summer, that there are a number of countries that should have been a bit more aggressive in thinking through this, and then there are others that have shown mature leadership.
I’m not sure how coordinated the exit from unconventional monetary policy can be because each country has its own set of circumstances, but I think there is certainly a need for cooperation and communication among officials and with markets. Central bankers, finance ministers and political leaders need to communicate with their colleagues on what their intentions are, what their assumptions look like and how they are thinking through their various timing and magnitudes of exiting - so that others can prepare in adequate fashion. There are some who will probably argue that they don’t know, or don’t know enough [to decide the timing of exit]. I think the way to address that is absolutely through better cooperation, coordination and communication. I mean this more about communication with each other about what they are doing rather than trying to sequence their actions it in a coordinated fashion. I’m not sure how such coordination could work, since each country has its own set of circumstances and challenges.
As for the question whether unconventional monetary policies were good for the global economy, absolutely, we averted a disastrous outcome and that will restore growth, or has done so already in many of the developed economies. The US is certainly recovering, albeit more slowly than anyone would like. So, you have the principal engines of global growth either having returned to some pathway of recovery or at least stabilized, as we have seen in Europe. That is positive for the global economy and therefore positive for emerging markets, especially those economies selling into the developed markets. All in all, unconventional monetary policies have been beneficial globally.
There have been spillover effects. We have seen capital flows into many of the emerging markets. Some of them responded by using capital controls and trying to counter the effects with macro-prudential policies, which were appropriate in some cases although less so in others. Those that pursued good policies and tried to dampen capital inflows and to adopt flexible exchange rates and strong, durable financial systems averted the worst and will benefit most and be less impacted as the flows recede or reverse. Those economies that took appropriate action and focused on fundamentals and tried to strengthen their financial systems will be less susceptible to the nastiness of the spillover effects, although there will be some. Also, emerging markets are less of a single asset class now. There is more heterogeneity and each of them has its own unique story. Those that have been big commodity producers are probably impacted by China’s slowing or potential slowing than by other external factors.
In general policymakers have done a pretty admirable job. These are unique and difficult circumstances and managing our way out of these various policy responses is going to be incredibly challenging. The emerging markets are going to be impacted, some worse than others, and the message to emerging market leaders - political and economic – is: you have got to focus on fundamentals. This has always been the case and it is even more so now.
Tim Adams is President and CEO of the Institute of International Finance (IIF).