A Cautionary History of US Monetary Tightening

But monetary tightening would weaken already slow growth.

But when and how the Fed will begin tightening monetary policy remains unclear.

The good news for Asia is that most of the region s monetary authorities are, in fact, tightening policy.

The only effective anti inflation strategy entails aggressive monetary tightening that takes policy rates into the restrictive zone.

Loosening monetary policy would increase significantly the risks stemming from local government debt and shadow banking, while tightening monetary policy would fully expose those risks, posing a serious systemic threat.

But a rising euro pushed higher by excessively early monetary tightening by the ECB implies more real appreciation, further undermining competitiveness.

This is, of course, a formidable task that may have to be accomplished at a time when Congress opposes monetary tightening.

Because of the lagged effects of monetary policy and the need to manage expectations, early tightening by the Fed would be appropriate.

It may have had something to do with the near total lack of response of long term interest rates to monetary tightening.

Second, they overestimated the extent to which quantitative easing (QE) by the monetary authorities that is, printing money could counterbalance fiscal tightening.

In Europe and Japan, for example, monetary and fiscal policies have been tightening in response to domestic concerns, further slowing the world economy.

But the recent popular use of the term awash with liquidity dates to 2005, a time when many central banks were tightening monetary policy.

The fact is that around most of the world, inflation and eventually inflation expectations will keep climbing unless central banks start tightening their monetary policies.

The ECB s paltry rate hike in December, together with the supine promise of no plans for further monetary tightening, demonstrates that Trichet is no Duisenberg.

We therefore express concern and reject the new measures recently implemented by the US government aimed at tightening the embargo.

But recipient economies are vulnerable to financial market sentiment and sudden capital flight as happened recently when investors anticipated monetary policy tightening in the United States.

In other words, the eurozone needs a European Monetary Fund that prevents this vicious circle from tightening by providing bridging finance when capital markets break down.

Unconventional measures are part of a broader transformation of monetary policymaking.

Against the background of a shaky global recovery, concerns have grown considerably over a possible hard landing for the Chinese economy, caused by monetary tightening aimed at controlling inflation.

A Grexit could prove to be the last straw, and would surely lead to a tightening in domestic monetary conditions at a very precarious point in the economic cycle.

Monetary tightening was not the only major policy error of the 1930 s so was a retreat into protectionism, symbolized by the Smoot Hawley tariff increases at the beginning of that decade.

Will Fed Tightening Choke Emerging Markets?

Crucially, monetary policy measures do not address the underlying problem of lack of demand.

Typically, the IMF assesses whether a country, after undertaking reasonable belt tightening measures, can service its debt and lends only when it is satisfied that it can.

To be sure, a country s domestic economic circumstances, and the tools available to policymakers, should guide policy. And, though monetary tightening may well be advisable in some economies, it might be inappropriate in others.

For example, many countries that were tightening their monetary policy when the first signs of turbulence emerged have either put interest rate hikes on hold, or, like Brazil, have already started to reduce rates.

Countries usually call in the IMF only when they have been jilted by international capital markets, and are faced with desperate tightening measures no matter where they turn.

The Bundesbank is also tightening credit at home.

Meanwhile, given the fragility and interconnectedness of the global economy, tightening monetary policy in the US could have negative impacts abroad (with consequent blowback at home), especially given the instability in China and economic malaise in Europe.

But it is politically impossible for the Chinese government to alter its exchange rate policy under pressure without some concession from the US, and a tightening of US monetary policy could be sold as such a concession.

This latest round of monetary tightening in China reflects the authorities growing concern over liquidity. In 2009, M2 money supply (a key indicator used to forecast inflation) increased by 27 year on year, and credit expanded by 34 .

The Fed was right to adopt new expansionary monetary measures in the face of a weak US recovery.

Financial markets appear to be expecting a good deal more Asian monetary tightening at least that s the message that can be drawn from sharply appreciating Asian currencies, which seem to be responding to prospective moves in policy interest rates.

Strong economic growth and expansive monetary policies further boosted the trend, as did protectionist measures, such as export restrictions.

But inflation remains high or rising, so more tightening is imposed.

At that time, both domestic investment and exports required immediate tightening.

Standard measures depend on the medium and long term outlook for price stability, whereas non standard measures depend on the degree of dysfunction of the monetary policy transmission mechanism.

These measures will fail to reduce interbank spreads significantly, because monetary policy cannot address the core problems underlying the crisis.

Sound judgment is needed regarding the speed and timing of regulatory tightening.

Others, especially on the political right, worried that the latest monetary measures would fuel future inflation and encourage unbridled government spending.

WASHINGTON, DC American foreign policy stands on the brink of substantial belt tightening.

As the Fed normalizes its monetary policy and the ECB doubles down on extraordinary measures, we certainly should hope for the best.

Indeed, if the shock is an increase in the dollar price of oil, an inflation target in theory dictates tightening monetary policy enough that the currency appreciates. But such a policy would mean that the adverse shock is reflected in a sharp fall in output.

Indeed, if the Fed makes an inadvertent mistake (the likelihood of this is considerable, given the country s complex situation and the unusually uncertain outlook), it is more likely to err on the side of staying accommodative for too long, rather than tightening monetary policy prematurely.