General Manager of the BIS: Beyond Zero Rates and Unconventional Monetary Policy

We have noted numerous speeches coming from Bank for International Settlements (BIS) officials warning about the impact of monetary policy "spillovers" in a globally inter-connected economy. Here is another such recent speech by BIS General Manager Jaime Caruana on this topic. He once again raises the idea that the world may need to "revisit the rules of the game" at the global level. Below are some quotes from the speech with some points of emphasis in bold.

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Abstract

"Monetary policy in major currencies can spill over to emerging market economies (EMEs) through various channels. Spillovers from global financial conditions have the effect of constraining EMEs' policy choices, making more likely the build-up of vulnerabilities, which are now appearing to spill back to world growth. This experience strengthens the argument for anticipating such spillovers and factoring them into policy ex ante, in a spirit of "enlightened self-interest", rather than only reacting to the spillbacks ex post. It also underscores the importance of persevering with policies that foster economic and financial resilience."

. . . . . 

"Easy monetary conditions in key currency countries have propagated themselves to the rest of the world - to EMEs and small advanced economies alike. Floating exchange rates have turned out to be not enough to insulate domestic policies from global conditions."

. . . . . 

Blind spot in the international monetary and financial system

We at the BIS have on various occasions spoken about how the current international monetary and financial system is unable to constrain the build-up of financial imbalances or to discourage spillovers and spillbacks. Global liquidity can amplify booms to the point of instability. This is what we have called a blind spot in the system.

There is a sort of tension in the current system. Economies and financial markets are increasingly interconnected globally. And yet central banks tend to interpret their policy mandates strictly in domestic terms. In other words, the game is global but the rules are mostly local.

How to reduce this tension? The response could be along the following three lines:

• First, if central banks could at least entertain a broader interpretation of their domestic monetary policy mandates so as to manage the financial cycle as well as the business cycle, most likely there would be fewer spillovers.
• Enlightened self-interest would take us a step further. This means taking potential spillovers and spillbacks into account when setting policy, rather than waiting for financial imbalances to build up to the point of feeding abruptly back into the domestic economy.
• Most ambitious would be to revisit the rules of the game more broadly, as has been suggested.

Click here to read the full speech

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My added comments: Here we once again see a top BIS official warning about easy money policies being a threat to global financial stability and promoting the idea that policies need to be globally oriented rather than nationally oriented (i.e. "the game is global but the rules are mostly local").