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The turmoil in the Emerging Markets currencies markets continues. Most EM central bankers seem to be very scared by the continued sell-off in Emerging Markets and central banks around the world have moved to hike interest rates and have intervened to curb the weakening of the Emerging Markets sell-off. This means that most EM central banks effectively are tightening monetary policy in response to a negative external demand shock. This is hardly wise in my view.
This week has brought more turmoil in the global Emerging Markets and this has caused a number of EM central banks to move to hike interest rates to "defend" their currencies (despite most Emerging Markets today officially have floating exchange rate regimes). Most notable the the Turkish central bank on Tuesday in a desperate move hiked its key policy aggressively. So far the aggressive actions from EM central banks around the world have done little to calm nerves in the global markets.
I have an up-ed in today's edition of UK's City AM on the risk of major monetary policy mistakes - a repeat of the 1997 Asian crisis - in Emerging Markets in response to the recent currency sell-off across the EM universe.
This is my hero George Selgin:
This is what I just told Ambrose Evans-Pritchard at the Telegraph:
Emerging Markets are once again back in the headlines in the global financial media – from Turkey to Argentina market volatility has spiked from the beginning of the year.
When I have written about monetary policy in Argentina I rarely have had anything positive to say. However, today I will have to say that the Argentine central bank made a sensible decision - even though it mostly looks like a coincidence.
John Maynard Keynes famously titled his magnus opus from 1936 The General Theory of Employment, Interest and Money. However, General Theory, as it is generally known, is nothing of the kind. It is not a General Theory of macroeconomics – rather it is a specific theory of macroeconomics making very specific assumptions about the workings of the economy and I will argue here that Keynes made very specific assumptions particularly about the monetary policy regime or rule under which the economy operates.
My friend Sam Bowman, Research Director at the Adam Smith Institute, has written a letter to the Financial Times calling for the introduction of a nominal spending target in the euro zone. This is from Sam's letter: