Why do emerging market figures criticize U.S. monetary policy?
James Bullard's 2 must-know views on international monetary policy (Part 4 of 4)
Policy criticism
The alternative view of international monetary policy coordination that James Bullard explained serves as a good representation of the criticism U.S. monetary policy faces from emerging markets.
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Taylor
In his recent speech, St. Louis Fed President and CEO James Bullard mentioned a paper submitted by John B. Taylor to the Bank for International Settlements (or BIS) titled International Monetary Policy Coordination: Past, Present and Future.
Taylor is a world-renowned economist known for his research on the foundations of modern monetary theory and policy, with expertise in monetary policy, fiscal policy, and international economics. He proposed the Taylor rule in 1993, and central banks have used it since then to help determine interest rates. Taylor was one of the first to write on the financial crisis. In his latest book, he develops an economic plan to restore U.S. prosperity.
In this paper, Taylor interprets recent monetary policy developments in the U.S. and other advanced economies (zero short-term interest rates and QE programs) as a deviation from rules-based policy. These deviations from rules-based policy at some central banks create incentives for other central banks to deviate, resulting in an inefficient global equilibrium.
What the FOMC needs to do
Considering that the U.S. Fed funds rate is zero lower bound, if unconventional monetary policy is ineffective, then the global equilibrium may be overly volatile. To ensure that overly volatile worldwide equilibria are avoided, the U.S. would need to make sure unconventional policies are aggressive enough to replicate the Taylor principle.
The difference between the two views
While concluding his speech, Bullard summed up the difference between the two views he had presented on international monetary policy coordination.
According to Bullard, the traditional view goes with the views of the defenders of U.S. monetary policy, including Bullard himself. The more radical view, on the other hand, seems to describe some emerging market commentators. The difference in views boils down to a judgment over whether unconventional U.S. policy is effective or not. The former adherents believes it is, while the latter believe it isn’t. To the proponents of the second view, effective monetary policy would mean policy that replicates Taylor’s principles.
This is to say that if unconventional U.S. monetary policy is effective, the traditional view is more nearly correct and the gains from international policy coordination would be small. On the other hand, if it’s ineffective, the alternative view is more nearly correct and the global gains from the U.S. shifting to a better policy may be large.
James Bullard’s conclusion
Bullard concluded by expressing his personal standpoint on the two views he presented. He believes U.S. monetary policy has been sufficiently aggressive to replicate the Taylor principle.
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