* Emerging markets selloff provides backdrop to debate
* Emerging nations need better capital flows tools - paper
* Central bankers told more global coordination needed
By Pedro da Costa and Alister Bull
JACKSON HOLE, Wyo., Aug 24 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.
Federal Reserve Bank of Atlanta President Dennis Lockhart
made clear that tapering could begin next month, provided the
economic news between now and then was not dramatically bad.
"I can get comfortable with September, providing we don't
get any really worrisome signals out of the economy between now
and the 18th of September," he told Reuters in an interview,
referring to the Fed's next meeting, which is on Sept. 17-18.
Concerns over Fed tapering 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
"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."
Lockhart said the Fed had a legal obligation to focus on
domestic U.S. goals, but allowed that there could be
circumstances when the international impact of its actions could
be taken into account.
"If a policy maker in the United States believed that the
global consequences of taking a domestic action would spill back
over into the U.S. economy in a very negative way, that clearly
is within the scope of consideration," he said in the interview.
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.