Currency volatility is one of the many symptoms of—and threats to—the global economy’s long malaise.
But unlike former days when exchange-rate pressures risked tearing up economies, currency accords are becoming anachronistic in some key policy circles. Capital controls, long anathema in the West, are now touted as the policies du jour.
Cross-border restrictions on capital, such as limits on foreign buying or selling of short-term bonds or currencies, could avert potential damage without the need to intervene in exchange rates, proponents argue.
The dollar’s surge has accompanied plummeting exchange rates for a host of emerging-market and advanced economies. Several bouts of volatility in foreign-exchange markets—fueled by central banks vying against one another for growth—prompted calls for the Group of 20 largest economies to draft a new, global deal to manage currency values.
Many analysts and economists called for a modern-day Plaza Accord to tame damaging currency swings and prevent a dangerous cascade of tit-for-tat currency interventions. Back then, the 1985 deal between the U.S., France, Germany, Japan and the U.K. orchestrated a depreciation of the dollar to ward off a dangerous swell of support for protectionist trade policies in the U.S.
Now, while protectionist policies are once again on the rise, policy makers are struggling to see eye-to-eye on the appropriate policies needed to fix the world’s economic ails. The closest G-20 economies have come to a currency deal is agreeing not to surprise one another with major policy changes. “Our relevant authorities will consult closely on exchange markets,” G-20 leaders vowed this week.
“I wouldn’t see the G-20 embarking on a new Plaza Accord or some grand scheme of that sort, which would really force them to subjugate national, monetary, and fiscal policies to an exchange-rate goal,” says International Monetary Fund chief economist Maurice Obstfeld. “That’s something that’s simply not going to happen.”...
... Emerging markets should be given license to use capital controls to avert damaging exchange-rate volatility, the former IMF chief says, rather than reverting to foreign-exchange intervention.
To be clear, Mr. Blanchard says such a license comes with strong caveats, given the technical and political implications associated with capital controls.,,,