In the last month alone, Australia, India, Mexico, and others have cut interest rates. China has reduced reserve requirements on banks. Denmark has taken its official deposit rate into negative territory.<\/p>\n
Even the most stability-obsessed countries have made unexpected moves. Beyond cutting interest rates, Switzerland suddenly abandoned the policy\u00a0 of partly pegging the franc\u2019s value to that of the euro. A few days later, Singapore unexpectedly altered its exchange-rate regime, too.<\/p>\n
More consequential, the European Central Bank has committed to a large and relatively open-ended program of large-scale asset purchases.<\/p>\n
Even the US Federal Reserve, which is presiding over an economy that is performing far better than its developed-world counterparts,\u00a0 keeps interest rates low.<\/p>\n
This new round of central-bank activism reflects persistent concerns about economic growth. Despite a once-unthinkable amount of monetary stimulus, global output remains well below potential, with the potential itself at risk of being suppressed.<\/p>\n
Weak demand and debt overhangs are fueling concerns about deflation in the eurozone and Japan.<\/p>\n
If weak demand and high debt were the only factors in play, the latest round of monetary stimulus would be analytically straightforward. But they are not. Key barriers to economic growth remain largely unaddressed \u2013 and central banks cannot tackle them alone.<\/p>\n
Central banks cannot deliver the structural components \u2013 for example, infrastructure investments, better-functioning labor markets, and pro-growth budget reforms \u2013 needed to drive robust and sustained recovery. Nor can they resolve the aggregate-demand imbalance.<\/p>\n
IMonetary-policy instruments have become increasingly unreliable in generating economic growth, steady inflation, and financial stability.<\/p>\n
The divegene of economic and monetary poicy among three of the world\u2019s most systemically important economies \u2013 the eurozone, Japan, and the United States \u2013 has added another layer of confusion for the rest of the world, with particularly significant implications for small, open economies.<\/p>\n
Of course, not all currencies can depreciate against one another at the same time.<\/p>\n
The first condition is America\u2019s continued willingness to tolerate a sharp appreciation of the dollar\u2019s exchange rate. Given warnings from US companies about the impact of a stronger dollar on their earnings \u2013 not to mention signs of declining inward tourism and a deteriorating trade balance \u2013 this is not guaranteed.<\/p>\n
Still, as long as the US maintains its pace of overall growth and job creation \u2013 a feasible outcome, given the relatively small contribution of foreign economic activity to the country\u2019s GDP \u2013 these developments are unlikely to trigger a political response for quite a while. The second condition for broad-based currency depreciation is financial markets\u2019 willingness to assume and maintain risk postures that are not yet validated by the economy\u2019s fundamentals.<\/p>\n
In any case, central banks will have to back off eventually. The question is how hard the global economy\u2019s addiction to partial monetary-policy fixes will be to break \u2013 and whether a slide into a currency war could accelerate the timetable.<\/p>\n<\/div>\n
![\"Currency](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2015\/02\/Currency-Wars-300x135.jpg\")
<\/a><\/div>\n","protected":false},"excerpt":{"rendered":"Mohamed el a Erian writes:\u00a0 Six and a half years after the global financial crisis, central banks in emerging and developed economies alike are continuing to pursue unprecedentedly activist \u2013 and unpredictable \u2013 monetary policy. How much road remains in … Continue reading