Date
13 December 2017
One proposal from a central bank official calls for a permanent liquidity facility, building on dollar swaps. Photo: Internet
One proposal from a central bank official calls for a permanent liquidity facility, building on dollar swaps. Photo: Internet

Central bankers talk new currency system, safety net

Central bankers from around the world are meeting on the Indonesian island of Bali to swap ideas on how to address global economic and financial risks.

They’re agreed that it’s time to think out of the box.

Policymakers from Switzerland to the Philippines said conventional monetary policy alone is no longer enough to manage growth, Bloomberg reports.

Also, they discussed inadequacies in the global financial safety net system.

Raghuram Rajan, outgoing governor of the Reserve Bank of India, reiterated his proposal for a new permanent liquidity facility, building on dollar swaps that were established between the Federal Reserve and a selection of central banks after the 2008 financial meltdown, to ensure funding during emergencies.

“Longer term, we need some agreement between the fund and major central banks,” Rajan said, referring to the International Monetary Fund.

The plan “would allow the fund to be a backstop to a liquidity facility from the central banks that don’t come on an individual bilateral basis but on a multilateral consensus”.

Ravi Menon, managing director of the Monetary Authority of Singapore, said there’s a case to explore ideas such as “target zones” to help limit currency volatility.

“Even if you allow considerable amount of flexibility in exchange rates, are there some kind of target zones that can be set internationally, and an international coordinating mechanism to make sure that exchange rates stay within those target zones?” Menon said.

Another argument for the method is that it “conditions market expectations and prevents overshooting and undershooting” of currencies, he said.

Simon Potter, an executive vice president of the Federal Reserve Bank of New York, told the conference that currencies have become more important recently.

“In our current environment, the role of the exchange rate in trade and current-account adjustments becomes more critical as monetary policy stances diverge across the major economic areas,” he said.

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