Bernanke: Expansionary Monetary Policy 'Appropriate,' Helps All Nations

Federal Reserve Chairman Ben Bernanke Monday defended the easy money policies of the Fed and other major central banks and denied they are hurting emerging market nations.

Bernanke also insisted advanced countries' monetary policies are aimed at spurring aggregate demand, not at engineering "competitive devaluations" at the expense of emerging markets in remarks prepared for the London School of Economics.

Bernanke did not talk about prospects for U.S. monetary policy less than a week after the Fed's interest rate-setting Federal Open Market Committee reaffirmed its policies of holding the federal funds rate near zero and of holding down long-term rates by purchasing $85 billion per month of Treasury and mortgage backed securities in pursuit of "substantial" labor market improvement.

But he left no doubt he thinks that highly stimulative policies continue to be in order.

"Today most advanced industrial economies remain, to varying extents, in the grip of slow recoveries from the Great Recession," he said. "With inflation generally contained, central banks in these countries are providing accommodative monetary policies to support growth."

Bernanke later said "the advanced industrial economies are currently pursuing appropriately expansionary policies to help support recovery and price stability in their own countries."

"These policies confer net benefits on the world economy as a whole and should not be confused with zero- or negative-sum policies of trade diversion," he continued. "In fact, the simultaneous use by several countries of accommodative policy can be mutually reinforcing to the benefit of all."

At the February Group of 20 meeting in Moscow and on other recent occasions, Brazilian and other emerging market officials have alleged that the low rate policies being pursued by the Fed and other major central banks are hurting their economies both by putting upward pressure on their currencies and by fomenting asset price bubbles.

Ahead of the G20 meeting, finance ministers and central bank chiefs of the Group of Seven industrial nations, including Bernanke, issued a statement reiterating their "longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets." And they "reaffirm(ed) that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates."

Bernanke referenced that statement in his London speech as he denied the emerging market accusations.

Answering his own rhetorical question about whether stimulative monetary policies constitute competitive devaluations, Bernanke asserted, "To the contrary, because monetary policy is accommodative in the great majority of advanced industrial economies, one would not expect large and persistent changes in the configuration of exchange rates among these countries."

He said "the benefits of monetary accommodation in the advanced economies are not created in any significant way by changes in exchange rates; they come instead from the support for domestic aggregate demand in each country or region."

"Moreover, because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not 'beggar-thy-neighbor' but rather are positive-sum, 'enrich-thy-neighbor' actions," he added.

Bernanke said "the distinction between monetary policies aimed at domestic objectives and trade-diverting exchange rate devaluations or other protectionist measures is critical. The former can be mutually beneficial, the latter are not.

He said, "It was this view that prompted the Group of Seven central bankers and finance ministers to issue a statement in February agreeing to refrain from actions focused on achieving competitive advantage by weakening their currencies and reaffirming that fiscal and monetary policies would remain oriented toward meeting domestic objectives using domestic instruments."

Bernanke contended easy money policies help the advanced countries collectively without hurting emerging market nations.

"Among the advanced economies, the mutual benefits of monetary easing are clear," he said.

Bernanke conceded that "the case of emerging market economies is more complicated," but went on to argue that they too benefit more than they are hurt.

"Regarding the effects of monetary easing on exchange rates and exports, I would note that trade-weighted real exchange rates of emerging market economies, with some exceptions, have not changed much from their values shortly before the intensification of the financial crisis in late 2008," he said.

"Moreover, even if the expansionary policies of the advanced economies were to lead to significant currency appreciation in emerging markets, the resulting drag on their competitiveness would have to be balanced against the positive effects of stronger advanced-economy demand," he continued.

Bernanke said Fed model simulations "suggest that the effects are roughly offsetting, so that accommodative monetary policies in the advanced economies do not appear, on net, to have adverse consequences for output and exports in the emerging market economies."

"A return to solid growth among the advanced economies is ultimately in the interest of advanced and emerging market economies alike," he added.

Bernanke said that emerging market nations experiencing large capital inflows in search of higher yields may need to resort to capital controls in some cases.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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