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The World’s Reluctant Central Banker

In a largely dollarized world economy, the only certain tool for avoiding liquidity crises is a lender of last resort in dollars, and that lender is the US Federal Reserve. The sooner the US and the rest of the world fully recognize this, the safer the world economy will be.

NEW YORK – This is supposed to be the era of powerful central banks, ready to wield their firepower worldwide. Yet the most powerful of all central banks – the United States Federal Reserve – is also the most reluctant to acknowledge its global reach.

Like all central banks, the Fed has a local mandate, focused on domestic price stability and employment. But, unlike most central banks, the Fed has global responsibilities. This tension is at the root of some of the most threatening problems facing the world economy today.

The Fed has global responsibilities for two closely related reasons, neither of which has much to do with the need to avoid the “currency wars” that so concerned former Brazilian Finance Minister Guido Mantega.

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