–Weigh Risk of ‘Premature Exit’ Vs. Waiting ‘Too Long’
By Steven K. Beckner
(MNI) – It is in the “medium term” that the Federal Reserve and
other central banks must “exit” from accommodative monetary policies,
Fed Chairman Ben Bernanke said Monday morning in South Korea.
Bernanke, in remarks prepared for a Bank of Korea conference in
Seoul, said the BoK and others must balance the risks of a “premature”
exit against the risks of waiting “too long” to tighten policy.
He said the timing of tightening will differ from country to
country, and said it is up to each individual central bank to “carefully
monitor economic developments.”
Bernanke praised South Korea and other Asian countries for learning
lessons from the Asian crisis of the late 1990s, including making their
exchange rate regimes more flexible. Those changes made the recent
financial crisis easier for the region to withstand, he said.
Although he steered clear of U.S. macroeconomic developments and
U.S. monetary policy, his more general comments about challenges facing
the host central bank and its counterparts in the West had relevance for
the challenges facing the Fed in coming quarters.
His comments on the 60th anniversary of the BoK suggested that no
near-term tightening is on the horizon, befitting the Federal Open
Market Committee’s recently reaffirmed expectation that the federal
funds rate will likely stay “exceptionally low … for an extended
period.”
“In the medium term, like the Federal Reserve and many other
central banks, the Bank of Korea will have to manage its exit from
accommodative policies,” said Bernanke.
“As is typically the case in the early stages of an economic
recovery, the Bank will have to weigh the risks of a premature exit
against those of leaving expansionary policies in place for too long,”
he continued. “Because economic conditions vary, the appropriate timing
of the exit is likely to differ across countries.”
“To guide these important decisions, each central bank will have to
carefully monitor economic developments in its own jurisdiction,”
Bernanke added.
Noting that the BoK had slashed interest rates by 325 basis points
and taken other unconventional steps to combat the financial crisis in
cooperation with the Fed and others, Bernanke said such aggressive,
countercyclical policies might have been difficult not long ago.
The fact that the BoK and other Asian monetary authorities were
able to do so, he said, is partially a tribute to reforms made since the
Asian crisis.
Part of Asia’s resilience in face of the recent crisis was due to
the fact that it originated in the West and that Asian countries had
“little direct exposure to structured credit products and other troubled
securities and entered the crisis in relatively sound condition.”
But “in addition, following the Asian financial crisis in the late
1990s, Korea and a number of other countries in Asia, Latin America and
elsewhere took decisive steps to strengthen their macroeconomic
frameworks and financial systems,” he said.
“On the macroeconomic side, these countries achieved strong
economic growth through structural reforms and sound monetary and fiscal
management,” he elaborated. “Like a number of other emerging market
nations, Korea achieved fiscal and current account surpluses; it also
took out insurance against volatility in capital flows by accumulating a
large stock of foreign exchange reserves.”
“On the financial side, Korea and other countries reformed their
banking sectors and worked with banks to strengthen their balance
sheets,” he said.
Bernanke also observed that “currency and maturity mismatches were
important problems for several countries during the Asian crisis, as
they made financial conditions in these countries vulnerable to a loss
of confidence by investors.”
“Currency mismatches in particular — the fact that the assets of
households, firms, and banks were largely denominated in the domestic
currency while many liabilities were in foreign currencies — proved a
constraint on monetary policy,” he continued. “Central bankers
understood that any reduction in the policy rate would likely weaken the
currency, which in turn would raise the value of domestic borrowers’
liabilities relative to their assets, with negative consequences for the
solvency of both the nonfinancial corporate sector and the banking
system.”
“However, in the years following the Asian crisis, currency and
maturity mismatches were reduced substantially,” he went on. “In sum,
stronger macroeconomic and financial fundamentals gave Korean
policymakers the flexibility they needed to respond to the crisis with
more expansionary monetary and fiscal policies.”
Bernanke said “improvements in the Bank of Korea’s monetary
framework served the country well during the crisis and are likely to
provide additional benefits in the future.”
“Over the past decade, many emerging market economies, including
Korea, have reoriented monetary policy toward domestic price stability
and away from a focus on stabilizing exchange rates,” he said. “The Bank
of Korea, indeed, adopted a formal inflation targeting regime in 1998.”
“Since then, the exchange value of the won has become more
flexible, inflation has declined to an average of about 3%, and — as I
have discussed today — the ability of the Bank to conduct appropriate
countercyclical monetary policies has increased,” he added.
** Market News International **
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