Blog Post

The G20 and the coordination of economic policies

In recent decades economists have been calling for more coordination of the countries’ macroeconomic policies. Some institutions, and especially the IMF, are formally charged with, or are expected to facilitate and promote, this coordination and some issues are analyzed and discussed within the IMF. At particular times countries have been asked to coordinate their fiscal […]

By: Date: November 5, 2010 Topic: Global economy and trade

In recent decades economists have been calling for more coordination of the countries’ macroeconomic policies. Some institutions, and especially the IMF, are formally charged with, or are expected to facilitate and promote, this coordination and some issues are analyzed and discussed within the IMF. At particular times countries have been asked to coordinate their fiscal policies, to help pull the world’s economies out of recessions. In the past couple years the G20 has played an increasingly active role in making these calls. At other times the countries have been asked to coordinate other policies. In all cases the objective has been to improve macroeconomic policies, at the global level, and to prevent, or reduce, potential, negative, cross-countries’ spillovers. These spillovers may be caused by the actions of single countries or groups of countries.

The area where coordination remains random and occasional is that of monetary policy. Central banks are expected to be politically independent domestically and, of course, also internationally. This independence has been seen as a major virtue and has been praised by many economists. However when a central bank as important as the Federal Reserve Bank or the European Central Bank acts in the pursuit of what are domestic objectives, it may affects the rest of the world, at times in major and not always positive ways. The actions of these large central banks almost always generate cross- border, or spillover effects that may cause difficulties for other countries.

For example some observers have in the past argued that the monetary policy that the Fed followed in the early 1980s might have contributed to the Latin America’s debt crisis of that decade, because it sharply increased interest rates, in its legitimate attempt to stop the high US inflation that was getting out of control. In more recent years many observers have blamed the Fed’s monetary policy, during the early part of this decade, for causing the sub-prime crisis that led to the “great depression” and that damaged the economies of other countries. In both cases the Fed was, rightly or wrongly, pursuing what it believed were legitimate domestic objectives.
Since last year the Fed has been injecting enormous amounts of liquidity in the global monetary system, liquidity that will penetrate not just into various parts of the US economy but will also spill over into the rest of the world, possibly eliciting some reactions on the part of other countries.
An issue that should be of concern to the G20 is that the Fed did not need to coordinate its policies, such as QE1 and QE2, with any international institution or group. It is doubtful that it even consulted in any meaningful way the IMF. This seems to be a major omission in the global architecture that is supposed to provide a framework for the surveillance and the coordination of macroeconomic policies.

Are there at least theoretical arguments in favor of making major central bank coordinate a little more internationally their actions when those actions have the potential for major cross-border externalities? For example should the Fed be expected to coordinate internationally an action such as that taken on November 3, 2010 (QE2) that will surely have major spill-over effects on other countries? Would such coordination be considered an attack on the Fed’s independence? Should the current IMF surveillance practice be considered sufficient in dealing with these major actions? Should the G20 address this issue even though it may be a hot potato and one too politically sensitive and possibly without a solution?

The Fed QE2 announcement was followed immediately by some fall in the value of the US dollar. This fall may invite other countries to react to protect the value of their currencies. This is clearly a demonstration that the Fed action is an issue of international significance. However, the FOMC latest statement, where international factors are not even mentioned, makes it clear that the Fed was acting strictly in accordance with its mandate. That mandate states that the Fed’s responsibility is that of maintaining domestic price stability and promoting domestic employment. The mandate does not say anything about avoiding the impact of its actions on the rest of the world. This is the real problem and the issue for the G20.It may become a bigger issue in the future.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event
 

Past Event

Past Event

Three data realms: Managing the divergence between the EU, the US and China in the digital sphere

Major economies are addressing the challenges brought by digital trade in different ways, resulting in diverging regulatory regimes. How should we view these divergences and best deal with them?

Speakers: Susan Ariel Aaronson, Henry Gao, Esa Kaunistola and Niclas Poitiers Topic: Digital economy and innovation, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 19, 2022
Read about event More on this topic
 

Past Event

Past Event

Is China’s private sector advancing or retreating?

A look into the Chinese private sector.

Speakers: Reinhard Bütikofer, Nicolas Véron and Alicia García-Herrero Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 18, 2022
Read article
 

Blog Post

The EU needs transparent oil data and enhanced coordination

The EU lacks the coordination structure and transparent data necessary to most effectively navigate an embargo on Russian oil.

By: Agata Łoskot-Strachota, Ben McWilliams and Georg Zachmann Topic: Global economy and trade, Green economy Date: May 16, 2022
Read article
 

Blog Post

Now is not the time to confiscate Russia’s central bank reserves

The idea of confiscating the Bank of Russia’s frozen reserves is attractive to some, but at this stage in the Ukraine conflict confiscation would be counterproductive and likely illegal.

By: Nicolas Véron and Joshua Kirschenbaum Topic: Banking and capital markets, Global economy and trade Date: May 16, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

The cost of China's dynamic zero-COVID policy

What does zero-COVID mean for both China and the global economy?

By: The Sound of Economics Topic: Global economy and trade Date: May 11, 2022
Read article More on this topic
 

Opinion

For Europe, an oil embargo is not the way to go

Even at this late hour, the European Union should consider taking a different path.

By: Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 9, 2022
Read about event More on this topic
 

Upcoming Event

Jun
23
14:00

BRI 2.0: How has the pandemic influenced China’s landmark Belt and Road Initiative?

China's Belt and Road Initiative is undergoing a transformation after two years of pandemic. How is it changing and what are the consequences for Europe.

Speakers: Alessia Amighini, Eyck Freymann, Alicia García-Herrero and Zhang Xiaotong Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article
 

External Publication

The Global Quest for Green Growth: An Economic Policy Perspective

A review on green growth and degrowth arguments.

By: Klaas Lenaerts, Simone Tagliapietra and Guntram B. Wolff Topic: Global economy and trade, Green economy Date: May 5, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

Global trade Down Under

A conversation on the global trading landscape.

By: The Sound of Economics Topic: Global economy and trade Date: May 4, 2022
Read article More on this topic
 

Opinion

A tariff on imports of fossil fuel from Russia

A tariff on imports of Russian fossil fuels would allow Europe to hit Russia's energy sector without great suffering.

By: Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Read article More on this topic
 

External Publication

How to weaken Russian oil and gas strength

Letter published in Science.

By: Ricardo Hausmann, Agata Łoskot-Strachota, Axel Ockenfels, Ulrich Schetter, Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Load more posts