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Each country first has to do its part
Countries that call for international cooperation have to sit down and assess the strength of domestic cooperation. If there is no such cooperation across the domestic economy, their right to demand domestic cooperation can easily be challenged.
During the first episode after the crisis, that is in the late 2008 and in 2009 roughly, international cooperation climate was gradually replaced by an environment where individual countries pursue their respective policy agendas, especially starting in the late 2010. The sense of cooperation vanished.
This is a widely debated issue across emerging market economies, since the steps taken by other countries to sort things out in their national economies give way to major problems for emerging market economies. But we need to keep in mind that there was a common interest during the first episode of the crisis: all economies throughout the world either shrunk or grew way below their potential. Therefore, what is needed was policies that stimulate domestic demand. And so was done. That’s what I mean with “common interest.”
But this time it is different: the US economy has recovered and soon interest rates will be raised. Europe has started to give signs of another recession. That’s why we can expect that the US further loosens the reverse monetary policy. The UK might tighten its monetary policy even before the US. Chinese banking sector is turbulent. Emerging market economies are shy on a possible pace in monetary tightening in the US. They call for cooperation against the risk of drying of foreign fund inflows and hence of harsh changes across financial markets.
The first measure that comes to mind (indeed this is one of the few options available) is to launch borrowing facility for USD between the FED and national central banks of emerging market economies. But the US refrains from such systemic cooperation except for a few countries. Alternatively, it is debated whether the IMF would undertake such task - only debated; nothing beyond that. Yet, major fluctuations that took place in emerging market economies between May 2013 and March 2014 were real. What is more, these movements can exacerbate. Debates are not useful if they do not boil down to a viable policy, which does not seem possible for now.
On the other hand, countries that call for international cooperation have to sit down and assess the strength of domestic cooperation. If there is no such cooperation across the domestic economy, their right to demand domestic cooperation can easily be challenged. For instance, they have to consider the level of cooperation between the institution in charge of price stability, that is the central bank, and institution(s) in charge of financial stability.
Turkey is troubled on that account. For instance, the Central Bank of Turkey started raising required reserve ratios starting in the late 2010 in order to lower the volume of bank’s credit supply. But the vast majority of the instruments to limit credit growth are at the disposal of the Banking Regulation and Supervision Agency (BRSA). Changing reserve requirements is hence not a solid policy option. Or at least, the policy can work only it is combined with other policy tools controlled by the BRSA. The agency, however, did not step up until June 2011, except for a minor measure announced in the late 2010 while the Central Bank took consecutive action to raise reserve requirements. There are similar examples from the 2013-2014 period, both there is no need to beat a dead horse.
Please note that I am not discussing which institution did the right thing. The problem is that they were not cooperating. During the same timeframe, Brazil and Indonesia mobilized a wide array of policy tools against rapid credit growth, for instance. Long story short, cooperation among national institutions is as important as international cooperation. More critically, unlike the latter, a country can control the former.
This commentary was published in Radikal daily on 24.05.2014