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

Global Financial Cycles

A new paper examines the global financial cycle in capital flows, asset prices and in credit growth. This cycle co‐moves with the VIX, a measure of uncertainty and risk aversion of the markets. A key conclusion is that, because the determinants of the global cycle are effectively determined by Fed policy, the classic “policy trilemma” actually becomes a “dilemma”: independent monetary policies are possible if and only if the capital account is managed.
Dilemma not Trilemma:The Global Financial Cycle and Monetary Policy Independence, Hélène Rey, Aug 2013

The paper was presented at the 2013 Economic Policy Symposium organised by the FRB of Kansas City at Jackson Hole, Wyoming. Also highly readable is The Routes into and out of the Zero Lower Bound, Robert Hall, Aug 2013.