The International Implications of Competitive Monetary Expansion and Currency Devaluation.
In the aftermath of the global financial crisis (2007-2009) a number of advanced economies adopted unconventional monetary policies as interest rates reachedthe zero-lower-bound (ZLB). RaghuramRajan, the new Governor of the Reserve Bank of India has recently suggested that it is still unclear whether these “policies’ domestic benefits have offset their damaging spillovers to other economies.” Further, in a world with highly volatile capital flows, “central banks around the world, in an effort to keep capital away and hold down the exchange rate, risk becoming locked into a cycle of competitive easing aimed at maximizing their countries share of scarce existing world demand.” There is now aworrythat as the advanced economies exit from unconventional monetary policy, central banks in these countries may not account for the impact of their changing policies on emerging market economies. In response, emerging economies may engage in policies that maintain a competitive exchange rate in order to avoid running large trade account deficits.
Choose anemerging market country whose currency hasbeenrecently impacted by news that the U.S. Fed, ECB, Bank of England or the Bank of Japanmay begin to tapertheir unconventional monetary policies;describe what happened to the price of their currency and capital flows to and from the country;describe the tools that the country has used (or may use in the future) to mitigate the impact of future Fed/ECB/BoE/BoJ tapering; discuss whether you think these actions will be effectiveat maintaining a competitive exchange rate;and evaluate the benefits, costs, risks of these policy actions.
Required Background Reading:
• Fed Tapering News and Emerging Markets
See Williams, 2014, “Monetary Policy at the Zero Lower Bound, Putting Theory into Practice.” http://www.brookings.edu/~/media/research/files/papers/2014/01/16%20monetary%20policy%20zero%20lower%20bound/16%20monetary%20policy%20zero%20lower%20bound%20williams.pdf
See Ragan, 2014, ““Containing Competitive Monetary Easing.”
http://www.project-syndicate.org/commentary/raghuram-rajan-calls-for-monetary-policy-coordination-among-major-central-banks
Your paper should include the following(Note: Maximum Total Grade = 100%):
1. A short summary of recent newspaper articles and reportsdocumenting the adverse effects on the currency and capital flows from a particular emerging market. (10%)
2. Graphs, figures, tables as background information or evidence. Include these in an appendix, but refer to them in the main text. Collect data from World Bank, IMF, OECD, etc. websites. (10%)
3. The different reasons (suggested in articles and reports) why the countrymay face pressure asFed tapering become more and more likely. (10%)
4. The potential actions that the country has takenor may takein upcoming months. (10%)
5. The economic rationale behind these policies. Provide at least three references (i.e., journal articles) to economic theory.(30%)
6. The effectiveness of these policies in the short- and long-run. Provide economic rationale. (10%)
7. The potential costs and risks of these policy actions. Provide economic rationale. (10%)
8. A concluding paragraph with an explicit recommendation to the government of the country on an appropriate course of action.(5%)
9. A proper list of references. (5%)
