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The avoidance of monetary system conflict: A role for recognition theory in reconstituting the global monetary system

Published online by Cambridge University Press:  20 November 2017

JOHN D FELDMANN
JOHN D FELDMANN*
Affiliation:
Center for Financial Stability, 1120 Avenue of the Americas, New York, NY 10036
*
*Email: [email protected]
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Abstract:

This article examines the ongoing conflict in the global monetary system as a struggle over norms of recognition between the US Federal Reserve and the emerging market economies. The analysis demonstrates that the Fed, though dominant actor in the global monetary system, adopts a US-centric perspective and relies upon inadequate economic constructs that misrecognise periphery members and justify a dismissal of criticisms of its monetary policy actions. The article shows how the adoption of recognition principles in reconstituting the monetary rules of the game would provide the Fed with an understanding of the political economic essentials of member countries, a greater awareness of potential harms of its monetary policy actions and the importance of cooperation in reducing conflict and mitigating episodes of monetary instability.

Keywords

Federal Reservemonetary policyrecognition theory
Type
Research Article
Information
Global Constitutionalism , Volume 6 , Issue 3 , November 2017 , pp. 442 - 476
Copyright
Copyright © Cambridge University Press 2017 

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References

1 For example see T Lindemann, ‘Peace through Recognition: An Interactionist Interpretation of International Crises’ (2011) 5 Journal of Political Sociology 68; Lindemann, T, Causes of War: The Struggle for Recognition (ECPR Press, Colchester, 2010).Google Scholar

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6 (n 4) 7–8.

7 (n 5) 7.

8 (n 4) 7–8.

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10 Tully, ‘Approaches to Recognition, Power and Dialogue’ (n 9) 859. The analysis of the struggle over recognition in terms of dominant actor misrecognition – a central feature in the monetary policy conflict – relies on T Lindemann 2011 (n 1). The monetary policy conflict might be insightfully analysed in contestation frameworks: see A Wiener, ‘Theory of Contestation: A Concise Summary of Its Argument and Concepts’ (2017) 49 Polity 1.

11 Tully, ‘Approaches to Recognition, Power and Dialogue’ (n 9) 855.

12 Tully, ‘Recognition and Dialogue: The Emergence of a New Field’ (n 9) 86.

13 This is a T Lindemann description of the change in mindset.

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19 Wiener (n 15) 201.

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24 (n 22) 13–21.

25 ibid 14, 20.

26 This literature is surveyed in R Koepke, ‘What Drives Capital Flows to Emerging Markets? A Survey of the Empirical Literature’ (IIF Working Paper, Institute of International Finance, Washington, DC, April 2015); Bowman, D, Londono, J and Sapriza, H, ‘US Unconventional Monetary Policy and Transmission to Emerging Market Economies’ (2014) 55 Journal of International Money and Finance 57–9;Google Scholar J Gagnon, T Bayoumi, J Londono-Yarce, C Saborowski and H Sapriza, ‘Direct and Spillover Effects of Unconventional Monetary and Exchange Rate Policies’ (paper presented at the 16th Jacques Polak Annual Research Conference, International Monetary Fund, Washington, DC, 5–6 November, 2015). A recent note disputes these findings, though using a different methodology: J Clark, N Converse, B Coulibaly and S Kamin, ‘Emerging Market Capital Flows and US Monetary Policy’ (International Finance Discussion Paper Note, Board of Governors of the Federal Reserve System, October 2016).

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34 ibid (emphasis added).

35 G Mantega, ‘Statement by Guido Mantega, Minister of Finance of Brazil, on behalf of Brazil, Colombia, Dominican Republic, Ecuador, Guyana, Haiti, Panama, Suriname, and Trinidad and Tobago’ (Twenty-Fifth Meeting, International Monetary and Financial Committee, 21 April 2012).

36 G Mantega, ‘Statement by Guido Mantega, Minister of Finance of Brazil, on behalf of Brazil, Cape Verde, Dominican Republic, Ecuador, Guyana, Haiti, Nicaragua, Panama, Suriname, Timor-Leste, and Trinidad and Tobago’ (Twenty-Seventh Meeting, International Monetary and Financial Committee, 20 April 2013); G Mantega, ‘Statement by Guido Mantega, Minister of Finance of Brazil, on behalf of Brazil, Cabo Verde, Dominican Republic, Ecuador, Guyana, Haiti, Nicaragua, Panama, Suriname, Timor-Leste, and Trinidad and Tobago’ (Twenty-Ninth Meeting, International Monetary and Financial Committee, 12 April 2014).

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44 The issue of exorbitant privilege and corresponding responsibilities is discussed in Eichengreen, B, Exorbitant Privilege: The Rise and Fall of the Dollar (Oxford University Press, New York, NY, 2012)Google Scholar; Prasad, ES, The Dollar Trap: How the U. S. Dollar Tightened Its Grip on Global Finance (Princeton University Press, Princeton, NJ, 2014)Google Scholar; also see a classical treatment: Aliber, RZ, ‘The Costs and Benefits of the U.S. Role as a Reserve Currency Country’ (1964) 78(3) The Quarterly Journal of Economics 442.Google Scholar

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46 See Wiener (n 10). In contestation, the scholars’ engagement represents a practice of normative intervention.

47 Krichene (n 21).

48 Ibid 1, 17, 24.

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68 See M Fratzscher, M Lo Duca and R Straub, ‘On the International Spillovers of US Quantitative Easing’ (Working Paper Series No 1557, European Central Bank, 2013) 3, <https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1557.pdf>; Ahmed, S and Zlate, A, ‘Capital Flows to Emerging Market Economies: A Brave New World’ (2013) 48 Journal of International Money and Finance 221Google Scholar; Rogers, JH, Chiara, S and Wright, J, ‘Evaluating Asset-Market Effects of Unconventional Monetary Policy: A Cross-Country Comparison’ (FRB International Finance Discussion Papers No 1101, Board of Governors of the Federal Reserve System, Washington, DC, March 2014), <http://www.federalreserve.gov/pubs/ifdp/2014/1101/ifdp1101.pdf>>Google Scholar; Bowman, D, Londono, J and Sapriza, H, ‘U.S. Unconventional Monetary Policy and Transmission to Emerging Market Economies’ (FRB International Finance Discussion Papers 1109, Board of Governors of the Federal Reserve System, Washington, DC, June 2014), <https://www.federalreserve.gov/pubs/ifdp/2014/1109/ifdp1109.pdf>>Google Scholar; Bruno, V and Shin, HS, ‘Capital Flows and the Risk-taking Channel of Monetary Policy’ (2015) 71 Journal of Monetary Finance 119, 120;Google Scholar Davis, O, ‘How Do U.S. Interest Rate Hikes Affect Emerging Markets?’ IBTimes (17 September 2015), <http://www.ibtimes.com/how-do-us-interest-rate-hikes-affect-emerging-markets-2102118>..>Google Scholar

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71 Rey, ‘International Channels of Transmission of Monetary Policy and the Mundellian Trilemma’ (n 69) 6.

72 Ibid 2.

73 Ibid 1.

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76 The content of the Bernanke Mundell-Fleming lecture actually appeared in several forms – an oral lecture (a), a paper (b) and a summarising blog (c): B Bernanke, ‘Federal Reserve Policy in an International Context’ (Mundell-Fleming Lecture, 16th Jacques Polak Annual Research Conference, International Monetary Fund, Washington, DC, 5 November 2015), transcript at <https://www.brookings.edu/wp-content/uploads/2015/11/110515BROOKINGSBERNANKE-1.pdf>. A paper based on the speech, but with changes, was later published as B Bernanke, ‘Federal Reserve Policy in an International Context’ (Mundell-Fleming Lecture, 16th Jacques Polak Annual Research Conference, International Monetary Fund, Washington, DC, 5 November 5 2015), available at <https://www.imf.org/external/np/res/seminars/2015/arc/pdf/Bernanke.pdf>. And Bernanke summarised the speech in a blog, ‘What Did You Do in the Currency War, Daddy?’ (5 January 2016) available at <http://www.brookings.edu/blogs/ben-bernanke/posts/2016/01/05-currency-war-daddy>.

77 Bernanke, ‘Federal Reserve Policy in an International Context’ (n 76a) 22.

78 Bernanke, ‘What Did You Do in the Currency War, Daddy?’ (n 76).

79 For a discussion of intent and causal responsibility see Feldmann, J, ‘Causation and Consequences in Monetary Policy: Are Federal Reserve Policies Based on an Inadequate Theory of Causal Responsibility?’ (2016) 99(3) Soundings 321.Google Scholar

80 Bernanke, ‘Federal Reserve Policy in an International Context’ (n 76a) 52–64; Bernanke ‘Federal Reserve Policy in an International Context’ (n 76b) 23–37.

81 Bernanke, ‘Federal Reserve Policy in an International Context’ (n 76a) 37–41.

82 Ibid (n 76a) 14.

83 Schiff, JL, Burdens of Political Responsibility: Narrative and the Cultivation of Responsiveness (Cambridge University Press, Cambridge, 2014) 127.Google Scholar

84 Ibid.

85 Ibid.

86 Ibid 111.

87 Ibid 112.

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89 Tully, ‘Recognition and Dialogue: The Emergence of a New Field’ (n 9) 86.

90 Ibid 84.

91 Thompson, S and Yar, M (eds), Politics of Misrecognition (Routledge, New York, NY, 2016) 170, 172.Google Scholar

92 The Mundell-Fleming Theory is partly a hypothesis based on the uncovered interest rate parity condition and a finding from empirical studies where governments that have tried to simultaneously pursue all three goals and have failed. This theory reveals a lurking descriptive/prescriptive ambiguity in economic theorems whereby inductively derived rules of thumb become a prescriptive norms of practice. See Feldmann, J, ‘A Social Contract and Rules of Practice for the Fed’ (2016) 99 Soundings 1, 11ff.Google Scholar

93 Rey, ‘International Channels of Transmission of Monetary Policy and the Mundellian Trilemma’ (n 69) 6.

94 Ibid 2.

95 Tully, ‘Approaches to Recognition, Power and Dialogue’ (n 9).

96 Clark et al. (n 26).

97 Tully, ‘Recognition and Dialogue: The Emergence of a New Field’ (n 9) 87.

98 Ibid 88.

99 See Allan, P and Keller, A, ‘Is a Just Peace Possible without Thin and Thick Recognition?’ in Lindemann, T and Ringmar, E (eds), The International Politics of Recognition (Paradigm Publishers, Boulder, CO, 2007) 73Google Scholar; Tully, ‘Recognition and Dialogue: The Emergence of a New Field’ (n 9) 90.

100 Tully, ‘Recognition and Dialogue: The Emergence of a New Field’ (n 9) 91.

101 Ibid 93–4.

102 Allan and Keller (n 99) 71–2.

103 Tully, ‘Approaches to Recognition, Power and Dialogue’ (n 9) 85.

104 See the discussion of the conditional nature of rules of thumb in Feldmann, J, ‘A Social Contract and Rules of Practice for the Fed’ (2016) 99(1) Soundings 1.Google Scholar

105 Tully, ‘Recognition and Dialogue: The Emergence of a New Field’ (n 9) 88.

106 Habermas, J, The Theory of Communicative Action: Volume One—Reason and the Rationalization of Society, translated by McCarthy, Thomas A (Beacon Press, Boston, MA, 1984).Google Scholar

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109 Allan and Keller (n 99) 72ff.

110 Ibid 77.

111 Ibid 72.

112 Ibid 77.

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114 Schiff (n 83) 118.

115 Rajan (n 16) 4.

116 Bernanke (n 58).

117 Allan and Keller (n 99) 78.

118 Lindemann, ‘Peace through Recognition: An Interactionist Interpretation of International Crises’ (n 1) 68.

119 Rajan (n 16) 4.

120 Tully, ‘Recognition and Dialogue: The Emergence of a New Field’ (n 9) 95.

121 Under recognition theory, the attempt by Rajan to get the dominant actor to engage in dialogue and concession interest could be criticised as simply an example of a ‘masked interest’ inasmuch as Rajan is presenting the case on behalf of the weaker actor, the EME, so he has more to gain by dialogue and change of rules. See T Lindemann and A Giacomelli, ‘Recognition Theory and Material ‘‘Interests’’ in Humanitarian (Non) Intervention’, Mimeo (presented at a conference in July 2014, unpublished).

122 Rajan (n 16) 1.

123 J Caruana, ‘Policymaking in an Interconnected World’ (Speech delivered at The Federal Reserve Bank of Kansas City’s 36th Economic Policy Symposium on ‘The Changing Policy Landscape’, Jackson Hole, 31 August 2012) 5–6.

124 See the Final Report of the Financial Crisis Inquiry Commission, issued pursuant to Public Law 111-21 (January 2011) at <http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf>.

125 Bernanke, B, ‘The Subprime Mortgage Market’ (Speech delivered at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, Chicago, 17 May 2007), <http://www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm>>Google Scholar.

126 (n 22) 35.

127 Ibid 35.

128 Slaughter (n 14) 19.

129 (n 22).

130 Allan and Keller (n 99) 74, 77.