JACKSON HOLE, Wyoming The recent selloff in emerging markets is a classic case of being careful what you wish for.
When the Federal Reserve was ramping up its asset purchases to support a flagging U.S. economy, many officials overseas criticized the United States for putting undue upward pressure on their currencies. Most memorably, Brazilian Finance Minister Guido Mantega suggested rich countries were engaged in a "currency war" or a race to devalue to gain a trade advantage.
Now that the Fed is moving toward shuttering its bond-buying program, currencies in emerging markets have begun to plunge and there are growing fears of a possible crisis.
The Indian rupee and Turkish lira have sunk to record lows against the dollar, while the Indonesian rupiah has hit a four-year low. Mexico and Korea have faced pressure, as has Brazil, which last week put up $60 billion to stem the real's slide.
The risk of these pressures snowballing into a crisis that engulfs the world economy was the focus of much of this year's Federal Reserve conference at Jackson Hole, whose theme was the global dimensions of monetary policy.
Central bankers from around the world attended the conference, which wrapped up on Saturday, and their conclusion was not startling: unconventional monetary policy in developed nations such as the United States, while appropriate for domestic objectives, can have big spillover effects.
And, for better or worse, these policies - such as the Fed's bond buying and near-zero interest rates - have spurred the need for developing countries to create their own unconventional tools to control monetary flows.
But there was disagreement as to the degree central bankers in rich nations should pay attention to the overseas impact of their policies, as opposed to simply focusing on the economic goals of their home country, as has been traditionally the case.
Agustin Carstens, governor of Mexico's central bank, argued that central banks in rich countries cannot conduct policy in a vacuum, and must keep in mind the international effects or risk sparking another financial crisis.
Carstens warned about the dangers a mismanaged exit from unconventional monetary policies in countries like the United States would pose for the developing world.
"It would be desirable for advanced economies to implement a more predictable exit," he said during a panel discussion on Friday. "Better communication, speaking with one voice, is very important."
MINDING OUR OWN BUSINESS
Fed officials, both current and former, showed little interest in giving the international impact of their policies more weight. The Fed has been buying $85 billion in bonds each month, but plans to scale that back before year end and bring the purchases to a halt by mid-2014.
"We are there to set national policy for the betterment of the U.S. economy and do not have a lot of scope to go outside that set of considerations," Atlanta Federal Reserve Bank President Dennis Lockhart told Reuters on Saturday. "But if (a U.S. policymaker) saw real global risk, and said that is going to be a second order effect on our domestic economy, then that clearly could be considered, and I would consider it."
Donald Kohn, a former Fed vice chair and a candidate for the top job when current chairman 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.
He suggested the lack of exchange rate flexibility in some nations, such as China, meant other emerging economies had to bear the brunt of adverse effects from the Fed's policies.
"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.
The discussion veered from the ripples of Fed policy into what emerging states can do to insulate themselves.
One of the papers presented called on poorer nations to adopt so-called macroprudential policies, ranging from very targeted restraints on credit and leverage to more sweeping capital controls, to temper volatility in exchange rates and investments.
"Macroprudential policies are necessary to restore monetary policy independence for the non‐central countries," wrote Helene Rey, a professor at the London Business School. "They can substitute for capital controls, although if they are not sufficient, capital controls must also be considered."
Christine Lagarde, managing director of the International Monetary Fund, agreed capital controls might be needed in certain circumstances but said they should not be a first line of defense. The IMF had long stood against barriers to capital flows, but its view has evolved in the wake of the 2007-2009 financial crisis.
Many analysts worry about the efficacy of such policies, given a long history of failed currency interventions around the world that often, by revealing a country's financial weakness, have attracted speculators rather than deterred them.
The deputy central bank governor of Brazil, which has employed capital controls to stem rapid inflows in recent years, suggested they have likely helped to temper the monetary pressures the country is now facing. Luiz Pereira struck a lighter note in making his point.
"If you're throwing a party and you want to be more selective in allowing guests into your own party, probably you will have fewer people running for the exit doors" if something goes terribly wrong, he said.
If no restrictions were placed on the guest list, he continued, "the party gets too wild too soon."
"When you try to select your guests, you want the ones who come stay longer without getting too drunk."