Chronic. In politics as in economics, history never repeats itself identically. Thus, the inflationary puff that our countries are going through has little to do with those of the 1970s. At the time, wages and benefits were still largely indexed to the price index in industrialized countries, which were then spared by the digital revolution, and who did not yet tremble in the face of Chinese economic power.
Similarly, the sequence beginning today with the monetary tightening initiated by the Federal Reserve (Fed), which could raise its key rates by half a point as of March, will be unprecedented in more ways than one. Will it cause a storm in emerging countries, as feared by the International Monetary Fund (IMF)?
In May 2013, it was enough for the Fed to mention a reduction in its purchases of Treasury bonds to trigger a terrible chain reaction. Anticipating better returns in the United States, investors had repatriated en masse their capital invested in Brazil, South Africa or Turkey to New York. These outings caused the currencies of the countries concerned to fall, while increasing the price of imported products. The local central banks were then forced to raise their rates to stabilize their currency, which increased the cost of credit and triggered recessions.
This episode, called type tantrum by market observers, seriously undermined several prevailing financial theories. Starting with Mundell’s incompatibility triangle, according to which an economy cannot simultaneously pursue three objectives: autonomous monetary policy, free movement of capital and fixed exchange rate. Only two out of three of these targets are compatible.
Curbing excessive credit
Alas, the type tantrum demonstrated that, attractive as it is, Mundell’s triangle is a bit too simplistic to capture the financial reality of the globalized economy. The work of Hélène Rey, an economist at the London Business School, has since confirmed this: in 2013, emerging countries open to capital flows and allowing their exchange rates to float nevertheless lost the autonomy of their monetary policy – they were forced to align themselves with the Fed and raise their rates. Reason: there are major global financial cycles, where the monetary policy of advanced economies, in particular that of the United States, influences the rest of the world through the channel of credit, bank indebtedness and international capital movements.
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