The Case for Re-Regulating Capital Accounts

NEW YORK – Today’s debates over “currency wars” reveal two paradoxical features of the global economy. The first is that there is no mechanism linking world trade rules to exchange-rate movements. Countries spend years negotiating trade rules, but exchange-rate movements can, within days, have a greater impact on trade than those painstaking deals. Furthermore, exchange-rate movements are essentially determined by financial flows and may have no effects in terms of correcting global trade imbalances.

The second paradox is that monetary expansion may be largely ineffective in the country that undertakes it, but can generate large negative externalities on others. This is particularly true of the quantitative easing now underway in the United States, because the American dollar is the major global reserve currency.