Steven Pearlstein picks up a curious argument from Raghuram Rajan:
Ben Bernanke and his colleagues at the Federal Reserve, for example, have refused to acknowledge that by keeping interest rates at zero “for the foreseeable future,” they have begun to generate new bubbles in financial assets and overheated the economies of developing countries, where much of the money is going. These are many of the same folks, after all, who once claimed they couldn’t see the credit and real estate bubble developing right under their noses — and, once those bubbles burst, rejected criticism that overly loose monetary policy might have been a cause.
One economist whose warnings the Fed failed to heed back then was Raghuram Rajan, the former chief economist of the International Monetary Fund who in 2006 delivered a now-famous paper on the subject at the Fed’s annual retreat at Jackson Hole, Wyo. Now Raghuram is sounding the alarm again, warning that while a weak U.S. economy still requires the Fed to hold interest rates relatively low, keeping them at zero is both dangerous and unnecessary, generating little extra output in the United States while creating hot money flows abroad.
As Brad DeLong observes this is why different countries have different currencies and different monetary policies. In Brazil, unemployment is currently low and inflation is currently on the upswing. Consequently Brazil is raising interest rates. It’s possible that Brazil’s economy would be better off if the Brazilian monetary authorities had raised rates sooner or faster, but this is really a question for Brazil. Brazil is impacted by the United States, but it’s not America’s job to conduct Brazil’s monetary policy (note that if we tried to do this we’d do a lousy job), it’s Brazil’s job to adjust to global conditions in a Brazil.
Now in China, it’s a different situation. Since their currency is pegged to the dollar they sort of wind up importing US monetary policy. But that wasn’t Ben Bernanke’s idea, and we certainly not making the Chinese do it, we’re urging them to revalue their currency. The Chinese, as it happens, have a different idea about the best way to curb inflation. Maybe they’ll be vindicated or maybe not. But either way it would be strange for the Fed to try to make other countries’ policies for them.