Policy  BIS central bankers’ speeches  3  measures in the U.S., such as QE2, are trying to do just that. Beyond our professional assessment, a successful recovery in the U.S. is good for the world economy. By the same token, Chinese authorities have decided on a gradual path of adjustment to secure enough growth for all the social and economic needs they face. From a macroeconomic standpoint, their policy of exchange rate management is something many EMEs have tried several times, and although I am a firm believer that exchange rate flexibility is crucial for small open economies, it is of course not the general rule and is not be to be applied in all cases and under all circumstances, especially for large low-income economies. Overall, the world needs a sustained recovery in the U.S. and growth in China. The same is valid for EMEs. We need to contribute to the global adjustment, but our main concern must be the welfare of our citizens. Containing the current inflationary pressures is essential to allow for sustainable growth. Delaying monetary policy adjustment may result in more severe adjustments in the future. Also, rebuilding fiscal buffers is important in order to have a more balanced recovery and to be better prepared to conduct macroeconomic policies. Some days ago, the Chilean government announced a timely and relevant fiscal tightening that should contribute to the moderation of aggregate demand. The world is not going through a currency war; neither are EMEs being flooded by liquidity from advanced economies.
Global rebalancing of the world economy needs countries in a strong cyclical position to direct domestic demand to imports, while countries with insufficient domestic demand to increase exports. Exchange rate adjustment should facilitate this process. Therefore, a faster appreciation of the yuan would relieve some appreciatory pressures in other EMEs, making the adjustment more balanced. But, for this to be achieved on a sustained basis, it is not enough to let the exchange rate adjust. Structural reforms will also be required to achieve a sustainable and efficient reduction of China’s savings rate. On the other hand, a rise in advanced economies’ interest rates, in particular in the U.S., would also alleviate currency tensions. However, the main responsibility for policymakers is to secure sustainable growth in their home economies that favors their citizens, and we all have to deal with the repercussions of those actions. The response in emerging market economies Emerging market economies have been facing two challenges as a consequence of this global environment. First, exchange rate appreciation and a resumption of capital inflows, and second, inflationary pressures. Sometimes, these two challenges may lead to inconsistencies in macroeconomic management. However, it is important to highlight that in small open economies any attempt to persistently manage an exchange rate away from its fundamentals, in particular at an overvalued level, may end up leading to inflation. If the adjustment does not come from a change in the value of the currency, it will happen through inflation.