Capital Controls, Not Global Accords, Touted As the New Fix for Currency Volatility
From
Real Time Economics:
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.,,,