For example, the currently accommodative monetary policy of industrialised countries generates more liquidity at the global level than if emerging market economies’ currencies were free to float. Limits to the sterilisation of international capital inflows under currency pegs lead to generalised liquidity spillovers on a global scale.
At the same time the accumulation of foreign reserves by emerging market economies leads to downward pressure on long-term interest rates in global economies. This, in turn, intensifies the trends in asset and commodity prices, thus potentially leading to further imbalances and global inflation. When setting their policies, monetary policy-makers in industrialised countries should take this dimension into account.