Federal Reserve Chairman Ben S. Bernanke reiterated his criticism of China’s limits on the yuan, saying countries with large trade surpluses should let their currencies appreciate to aid the global economy.
“The maintenance of undervalued currencies by some countries has contributed to a pattern of global spending that is unbalanced and unsustainable,” Bernanke said without identifying China in a speech today in Paris. Those countries “will need to allow their exchange rates to better reflect market fundamentals and increase their efforts to substitute domestic demand for exports.”
The changes would help address what Bernanke called a “collective challenge” to “reshape the international monetary system.” While trying to deflect criticism from officials in China and Brazil over the Fed’s record stimulus, Bernanke in the speech cited “concerns” that monetary easing in advanced economies is fueling capital flows to emerging markets, spurring inflation and causing asset-price bubbles.
Bernanke balanced his China criticism by saying that countries with big trade deficits should aim to increase saving, “including putting fiscal policies on a more sustainable trajectory.” He didn’t mention the U.S. or European nations.
The Fed chief spoke at a panel discussion with other central bankers hosted by the Bank of France. Paris is hosting the Group of 20 meetings of central bankers and finance ministers this weekend.
Bernanke, 57, didn’t discuss the outlook for the U.S. economy and monetary policy. The Federal Open Market Committee last month affirmed plans to buy $600 billion of Treasuries through June even as policy makers raised their projections for U.S. growth this year. Bernanke is seeking to reduce 9 percent unemployment by bringing about a “sustained period of stronger job creation,” he said Feb. 3.
In an accompanying 38-page research paper, the first he’s written since becoming chairman in 2006, Bernanke and three Fed staff economists present evidence that demand from abroad for safe U.S. securities helped fuel America’s housing bubble last decade through the creation of AAA-rated securities tied to risky mortgages.
“To be clear, in no way do our findings assign the ultimate causality for the housing boom and bust to factors outside the United States,” the paper said. “However, an examination of how changes in the pattern of international capital flows affected yields on U.S. assets is important for understanding the origins and dynamics of the crisis.”
‘More Balanced Growth’
Responding to a question after his speech, Bernanke said governments around the world “need to talk more about coordination of monetary and fiscal policy both in the short run and the long run to allow for a more balanced growth path.” He cited a situation where demand isn’t “optimally allocated” worldwide.
The comments were part of a panel discussion featuring central bankers representing the world’s largest economies after the U.S.: People’s Bank of China Governor Zhou Xiaochuan, Bank of Japan Governor Masaaki Shirakawa, European Central Bank President Jean-Claude Trichet and Bank of England Governor Mervyn King.
In comments published today in the Bank of France’s Financial Stability Review, Zhou said “over-concentration of foreign assets in one particular currency may bring about undesired consequences.”
So in addition to improving regulation and rationalizing savings allocation, the G-20 “should move forward in reforming the international monetary system,” Zhou said.
Today’s remarks from Bernanke are similar to a November speech in Frankfurt, where he said countries that undervalue their currencies may eventually inhibit growth around the world and risk financial instability at home. While Bernanke also didn’t identify China in that speech, he took aim at “large, systemically important countries with persistent current-account surpluses.”
China has limited the yuan’s appreciation to promote exports that helped the country surpass Japan to become the world’s second-largest economy last year. China’s economy expanded 9.8 percent in the fourth quarter of 2010 from a year earlier.
In today’s comments, Bernanke said higher global commodity prices have resulted “significantly” from increased demand in emerging markets. Countries that allow their currencies to float freely “have seen their competitiveness erode relative to countries that have intervened more aggressively in foreign exchange markets,” he said.
Capital flows to emerging markets are being driven by expectations of faster growth and higher returns, and flows “are not out of line with longer-term trends,” he said. Policy makers in those countries have currency and policy tools they can use to manage their economies, Bernanke said, reiterating his rejection of the idea that the Fed is causing difficulties in financial markets in emerging-market countries.
Bernanke published several papers while serving as a Fed governor from 2002 to 2005. He wrote or co-wrote more than 40 research articles during his career as a monetary-policy scholar and economic historian at institutions including Princeton University.