The Blame Game

This year’s central bank gathering at Jackson Hole heard arguments that the classic policy “trilemma” has morphed into a “dilemma” (the Hélène Rey paper). The basic idea is that financial markets are now so globalised that free capital flows limit monetary policy independence even when the exchange rate is left to float. One possible conclusion is that market heavyweights like the Fed impose significant (negative) externalities on innocent bystanders when flooding the ailing US financial system with liquidity.
While understandable, such conclusions are too simplistic. As this article points out, the recent woes of emerging markets are as much to do with home-grown policy than with the Fed’s prospective tapering.
Don’t blame the Fed for EM woes, Financial Times, 4 Sep 2013