Dollars and Jens
Wednesday, January 19, 2011
basic international monetary theory
Ronald McKinnon has an op-ed in the Wall Street Journal in which he states that
In 2010, consumer price indexes shot up more than 5% in major emerging markets such as China, Brazil and Indonesia, while the consumer price index in the U.S. itself rose only 1.2%.China at least also is at a stronger growth point in its business cycle. It makes sense, then, that they should be running tighter monetary policy than the United States.
McKinnon's op-ed, though, has the curious title — which, if standard practice was followed, was not chosen by him, but by an editor — "The Latest American Export: Inflation". Which would make it a case of a country exporting something of which it is suffering from a shortage.
The first paragraph of the op-ed — which, if standard practice was followed, was chosen by him — seems of this spirit:
What do the years 1971, 2003 and 2010 have in common? In each year, low U.S. interest rates and the expectation of dollar depreciation led to massive "hot" money outflows from the U.S. and world-wide inflation. And in all three cases, foreign central banks intervened heavily to buy dollars to prevent their currencies from appreciating.
If "foreign central banks intervened heavily to buy dollars", thereby creating inflation, who's to blame? If the US economy is weak and shows no signs of inflation, and foreign countries have excessive inflation, in what universe is it appropriate policy for them to "prevent their currencies from appreciating" against the dollar? If someone's worried that the relative currency move will exacerbate China's trade deficit or the United States trade surplus, I imagine we could think of arguments to allay that concern as well.
Over the last few years, I haven't gone in as much for complaining about China's currency policy as seems to be popular in some circles; it does create international stability to some extent, but I don't feel it's bad enough to be worth much political capital — the primary victims, as with most of the Chinese government's policies, are the Chinese. At the same time, it's doubly ludicrous for anyone to complain about the US following appropriate monetary policy on the grounds that it creates problems for currency manipulation. If you insist on pegging your currency to ours, you are ipso facto imposing our monetary policy on your own currency. If your economic circumstances call for different policies, either impose our policy, or impose a different one — but if you impose ours, it's not our fault.