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Emerging Economies on Their Own

NEW YORK – There was a remarkable similarity between European Central Bank President Mario Draghi’s statement after a recent meeting of the ECB Governing Council and US Federal Reserve Chair Janet Yellen’s first testimony to Congress: both asserted that their policy decisions would take into account only domestic conditions. In other words, emerging-market countries, though subject to significant spillover effects from advanced economies’ monetary policies, are on their own.

This confirms what emerging-country authorities have known for a while. In 2010 – following the Fed’s announcement of a third round of quantitative easing – Brazilian Finance Minister Guido Mantega accused advanced countries of waging a global “currency war.” After all, advanced economies’ policies were driving large and volatile capital flows into the major emerging markets, pushing up their exchange rates and damaging their export competitiveness – a phenomenon that Brazilian President Dilma Rousseff later referred to as a “capital tsunami.”