by Desmond Lachman
How are the world's major central banks to coordinate their monetary policies in a manner that does not create excessive asset price bubbles and that does not heighten the risk of a currency war?
As international economic policymakers gather on Washington for this year's International Monetary Fund (IMF) annual meeting, there will be no shortage of issues for them to discuss. Outside of the United States, the world economic recovery is sputtering, geopolitical risks are on the rise, deflation risks are all too evident in Europe and Japan, and emerging market economies now have to deal with sharply falling international commodity prices. However, from the point of view of the long-run health of the global economy, the one issue that would appear to deserve the most attention strangely does not seem to be on the IMF meeting's agenda: How are the world's major central banks to coordinate their monetary policies in a manner that does not create excessive asset price bubbles and that does not heighten the risk of a currency war?
The potential importance of the monetary policies of the major industrialized countries at this stage of the global economic cycle can be gauged by developments over the past two years. In response to the Federal Reserve's third round of massive quantitative easing beginning in September 2012 and to the Bank of Japan's following suit at the start of 2013, there has been an unprecedented increase in international liquidity. As the Bank of International Settlements has recently noted, this liquidity has given rise to the emergence of overextended prices in a broad range of international asset markets that has to be a matter of considerable longer-run concern for the future health of the global economy. It has also led to very large capital flows to the emerging market economies and until very recently to a weakening in both the U.S. dollar and the Japanese yen.
Highlighting the need for a serious discussion of monetary policy issues at this year's IMF annual meeting is the fact that it coincides with a major inflection point in the monetary policies of the major industrialized countries.
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