Now Bernanke recommends macroprudential

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From time to time Australian regulators indulge in a bit of hand-wringing over the high dollar. When they do so they usually also blame the overvalued currency on the forces beyond their control, such as uber-low interest rates in funding currency nations such as the US.

Well, last night, speaking at the London School of Economics, Ben Bernanke had a message for these whingers of the regulatory sphere:

Today most advanced industrial economies remain, to varying extents, in the grip of slow recoveries from the Great Recession. With inflation generally contained, central banks in these countries are providing accommodative monetary policies to support growth. Do these policies constitute competitive devaluations? To the contrary, because monetary policy is accommodative in the great majority of advanced industrial economies, one would not expect large and persistent changes in the configuration of exchange rates among these countries. The benefits of monetary accommodation in the advanced economies are not created in any significant way by changes in exchange rates; they come instead from the support for domestic aggregate demand in each country or region. Moreover, because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not “beggar-thy-neighbor” but rather are positive-sum, “enrich-thy-neighbor” actions….

Regarding the effects of monetary easing on exchange rates and exports, I would note that trade-weighted real exchange rates of emerging market economies, with some exceptions, have not changed much from their values shortly before the intensification of the financial crisis in late 2008. Moreover, even if the expansionary policies of the advanced economies were to lead to significant currency appreciation in emerging markets, the resulting drag on their competitiveness would have to be balanced against the positive effects of stronger advanced-economy demand. Which of these two effects would be greater is an empirical matter. Simulations of the Federal Reserve Board’s econometric models of the global economy suggest that the effects are roughly offsetting, so that accommodative monetary policies in the advanced economies do not appear, on net, to have adverse consequences for output and exports in the emerging market economies. A return to solid growth among the advanced economies is ultimately in the interest of advanced and emerging market economies alike.

Regarding capital flows: It is true that interest rate differentials associated with differences in national monetary policies can promote cross-border capital flows as investors seek higher returns. But my reading of recent research makes me skeptical that these policy differences are the dominant force behind capital flows to emerging market economies; differences in growth prospects across countries and swings in investor risk sentiment seem to have played a larger role. Moreover, the fact that some emerging market economies have policies that depress the values of their currencies may create an expectation of future appreciation that in and of itself induces speculative inflows.

Of course, heavy capital inflows and their volatility pose challenges to emerging market policymakers, whatever their source. Policymakers do have some tools to address these concerns. In recent years, emerging market nations have implemented macroprudential measures aimed at strengthening their financial systems and reducing overheating in specific sectors, such as property markets. Policymakers have also experimented with various forms of capital controls. Such controls raise concerns about effectiveness, cost of implementation, and possible microeconomic distortions. Nevertheless, the International Monetary Fund has suggested that, in carefully circumscribed circumstances, capital controls may be a useful tool.

In sum, the advanced industrial economies are currently pursuing appropriately expansionary policies to help support recovery and price stability in their own countries. As the modern literature on the Great Depression demonstrates, these policies confer net benefits on the world economy as a whole and should not be confused with zero- or negative-sum policies of trade diversion. In fact, the simultaneous use by several countries of accommodative policy can be mutually reinforcing to the benefit of all.

Australia is not strictly speaking a developing nation but we do just as obviously fall into that category in terms of economic flows. Bernanke is spot on in my view in telling us and our brethren to stop whining and start acting. Our asset bubbles (and currencies)  are our own to manage and as the world’s most powerful central banker says, macroprudential tools are at least part of the solution.

Listen up RBA and APRA.

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Bernanke Speech – Monetary Policy & the Global Economy (March 25, 2013)

David Llewellyn-Smith
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  1. GunnamattaMEMBER


    ‘Australia is not strictly speaking a developing nation’

    Well our populace is filled to the plimsoll with debt which isnt very usual for a developing economy. And our legal system still appears fairly square.

    But our exports are all dug out of the ground, we have a banking sector backed by the govt focussed on one sector of the economy to the cost of others, a load of oligarchs divvying up the economy between them and a media sector which wouldnt leave a dent in a pound of warm butter.

    I reckon there is a fair chance we could be a developing economy sooner than we think.

    • Well said Gunna and UE!
      Never the less teh Aus population are not going to like it and woe betide any govt trying to introduce sensible policies.

    • Precisely! Developed nations are supposed to lend money to developing nations, not the other way around! Ergo…..

  2. Very good.

    I will strap copies to my trained herd of low interest rate ‘feed-lot’ raised debt Playtpus and send them in the direction of the RBA and APRA and all those other hand wringers who claim John Malkovich style “It is beyond my control”

    There is no inconsistency between having a floating currency and regulate some of the transactions that impact on the value of the currency.

    • GunnamattaMEMBER


      ‘I will strap copies to my trained herd of low interest rate ‘feed-lot’ raised debt Playtpus’

      Here was I think they are battery debt hens – they eat from the conveyor, they crap on another conveyor which brings it back past their mouths, the lights are always on, immortality is just another form of ennui. As long as the additives work they will even taste like chickens when defrosted and deep fried.

  3. “…these policies confer net benefits on the world economy as a whole and should not be confused with zero- or negative-sum policies of trade diversion.”

    I see someone who is petrified of tarifs and other trade protections which will goose the US economy.

  4. Central banks will never be able to identify speculative asset bubbles that are fueled by credit creation.

    After all, the central banks and fractional reserve lending are the root cause of all asset bubbles.

  5. “Our asset bubbles (and currencies) are our own to manage…”

    Yes, and on any comparative measure, so far, the tool kit in place has been managed well enough to provide relatively sound outcomes. Those sound outcomes have been achieved without yet another layer of policy/rules for the collective to wring its hands over.

    Strong dollar has, in part, been driven by the ‘safe haven’ current policies have engendered. On that basis a bit of a whinge by regulators is fair enough, don’t you think? They do a good job and AUD rises making you us competitive.

    On the other tack, I shudder to think what number of bureaucrats it would take to implement macro-prudential. And then what guarantee will we have that the talent to actually manage it will be in place.

  6. Weird speech but I’m not sure that the rest of the world read that as endorsing macro prudential policies.
    A couple of clarifications please?
    He only mentioned macroprudential in the context of emerging economies. Are we an emerging economy
    Similarly he mentions the IMF approving capital controls in certain circumtances , which upon googling the issue you find out is when there are no other policy responses such as lowering interest rates.
    So I’m reading this speech and hearing him saying that if you are an emerging economy with fixed or floating exchange rates that can be overpowered by capital flows, its ok to do macro prudential and capital controls
    However you seem to read it as saying that places like Australia and Canada and the Netherlands and Denmark which have had house price increases since 2007 should be using macro prudential cotrols (shouldwe all use the same ones as well?)
    Is he saying that everybody should be using macroprudential controls or just some economies sometimes?
    Just like a big game of chinese whispers isn’t it?

  7. Smokester
    You’re right…”Just some economies sometimes so that teh US can keep on with its own particular insanity.

    I don’t think any of us were paying too much heed to Bernank. We were just approving the commentary by UE and Gunna.
    Bernank seems to me to be part of the school of thinking that will never see the reality. He’s like some mad Frankenstein pulling levers all over the place according to his weird calculations.