With Janet Yellen taking over as Fed Chair we should examine the reach of United States monetary policy. When the Fed changes its monetary policy in response to a contraction it has impacts on foreign capital flows. The quantitative easing of the past several years has led to capital flows from the U.S. to higher interest rate foreign countries. This reversal in capital flows leads to more investment and potentially rapid expansion in emerging market economies. Some in the Fed, like Governor Powell have discussed the reach of the Federal Reserve to emerging markets, and downplayed the role that the Fed plays in foreign markets. Former Chairman Bernanke also stressed that the Federal Reserve does not have a responsibility to manage other countries economies.
However, others do not see it the same way. As implied by Powell, there were certainly changes in international capital movements when the Fed changed policy and conducted massive quantitative easing. Brazilian President Rousseff complained in 2012 that the U.S. monetary policy was distorting the Brazilian economy through excessive easing which affected their exchange rates and ability to export goods. Her comment “Expansionist monetary policies … ultimately lead to a depreciation in the value of the currencies of developed countries, thus impairing growth outlooks in emerging countries.” India’s reserve bank governor Rajam has made similar claims about India’s ability to compete during monetary policy easing. Specifically, he stated “The U.S. should worry about the effects of its polices on the rest of the world… We would like to live in a world where countries take into account the effect of their policies on other countries and do what is right, broadly, rather than what is just right given the circumstances of that country.” The taper has worried countries across the G20 that the taper could hurt economies like Indonesia. Poorer countries like Jamaica have even less ability to fend off any pressure they might experience due to the Fed’s taper.
Questions you might consider
So does the evidence support the belief that the Fed is being selfish? Or is there evidence that what is good for the U.S. is ultimately good for emerging market countries?
Does the U.S. economy’s return to health through unusual monetary policy ultimately benefit countries like Turkey, South Africa, Indonesia, India, Brazil, or Jamaica more than it would if the Fed didn’t do anything at all? Would we expect capital outflows from the U.S. even if the Fed hadn’t done anything in 2008-2014?
Wearing a “classical” hat for a moment, is the Fed even able to impact the U.S. economy in a meaningful way? If not, then why are they able to impact foreign countries in an even more substantial way?
Finally, is one of the reasons we haven’t seen much impact of QE in the U.S. due to the ‘leakage’ of stimulus to foreign economies? If so, shouldn’t this help our export sectors?
Remember, don’t try to answer all of these questions, just focus on one, provide some evidence, and support your opinion.