Developed world easing may raise heat in emerging economies: Lagarde

IMF chief says monetary policy in developed world raises risks of asset bubbles elsewhere

PUBLISHED : Monday, 15 October, 2012, 12:00am
UPDATED : Monday, 15 October, 2012, 2:53am

Monetary easing in the developed world could cause overheating and asset bubbles in emerging economies, the International Monetary Fund's managing director said here yesterday.

"Accommodative monetary policies … could strain the capacity of those economies to absorb the potentially large flows and could lead to overheating asset price bubbles," Christine Lagarde said.

Critics in emerging nations have argued that easing measures, particularly in the United States, have driven down the value of the US dollar and sparked huge capital flows to spill across their borders, raising the risk of overheating and driving up national currencies.

On Friday, Brazilian Finance Minister Guido Mantega warned that his country would take "whatever measures it deems necessary" to fight the problem.

"Emerging markets can't passively endure large and volatile capital flows and currency fluctuations caused by rich countries' polices," he said at the IMF and World Bank's annual meetings in Tokyo, which were wrapped-up yesterday.

"Advanced countries cannot count on exporting their way out of the crisis at the expense of emerging-market economies," Mantega said, adding: "Currency wars will only compound the world's economic difficulties."

However, US Federal Reserve chief Ben Bernanke yesterday rejected claims that central bank easing in rich countries was to blame for the huge waves of capital flowing into the developing world.

"It is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies," Bernanke said.

He said recent research, including studies by the IMF, "does not support the view that advanced-economy monetary policies are the dominant factor behind emerging market capital flows".

Bernanke said the "beneficial effects" of the Fed's policies in propping up the US economy - the world's biggest and a key developing world export market - should be given "appropriate weight".

Divisions between policymakers over such issues underscore the challenge of forging a unified response to what Lagarde described as the global economic "malaise".

South Korean Finance Minister Bahk Jae-wan said the IMF meetings failed to secure agreement and the world has a "leadership problem".

Agence France-Presse, Bloomberg