Federal Reserve Bank of Atlanta
Featured speaker: Barry Eichengreen
George C. Pardee and Helen N. Pardee Professor of Economics and Political Science
University of California–Berkeley
Eichengreen: Today’s Policies Similar to Post-Depression Currency Moves
The unconventional monetary policy actions undertaken since the financial crisis by the Federal Reserve and other central banks are similar to moves several nations made to devalue currencies following the Great Depression, said Barry Eichengreen, a noted currency expert and professor at the University of California–Berkeley.
Both sets of actions helped stabilize economic conditions in the wake of crises, Eichengreen told business, civic, and community leaders at the Atlanta Fed on June 24. Indeed, doing nothing amid a crisis carries greater risks than recent moves by central banks, including the large bond buying programs carried out by the Federal Reserve, said Eichengreen, Cal’s George C. Pardee and Helen N. Pardee Professor of Economics and Political Science.
In today’s circumstances, he added, countries would benefit from improved supervision and regulation of the financial sector, rather than abandoning unconventional monetary policies. He also noted that policymakers need to communicate their intentions clearly when instituting aggressive policy to avoid fears of “currency wars.”
Currency wars the topic of the evening
Competitive currency devaluations that countries use to stimulate exports and thus boost economic growth are known as “currency wars.” A country becomes more competitive after currency depreciation, as other countries can more cheaply buy its exports. However, domestic consumers lose purchasing power with a depreciated currency and may grow frustrated with devaluation, as the money they hold is worth less. In addition, currency wars can lead to exchange rate volatility and ultimately inhibit international trade.
In the 1930s, the United States, Japan, and the United Kingdom implemented aggressive expansionary monetary policies to alleviate widespread unemployment that followed a period of spending cuts and tax increases. Eichengreen noted that devaluations during the ’30s allowed for faster recovery from the Great Depression, as countries benefited from lower interest rates and stabilized price levels after suffering severe deflation.
Today’s unconventional monetary policies and central bank bond buying have had the positive effects of providing liquidity and the expectation of economic growth. The Bank of Japan’s recent actions, for example, are meant to encourage spending and foster the expectation of higher price levels. Current Japanese policies aim to achieve a 2 percent annual inflation rate. Japan’s inflation rate has been negative in recent months. If prices are expected to rise, the reasoning goes, people are likely to make purchases sooner while prices are lower.