Monetary easing in advanced nations to have negative spillovers in emerging economies: BOK Governor

Seoul (S. Korea) - Bank of Korea (BOK) Governor Kim Choong-soo said Thursday that monetary easing in advanced nations will have negative spillovers to emerging economies.

“Extraordinary monetary easing by major central banks does appear to have helped their home countries contain the fallout from the crisis. But many emerging countries were forced to confront adverse financial spillovers from large and sharp swings in the global liquidity condition," Governor Kim said at the opening remarks for the BOK conference co-organized with the International Monetary Fund (IMF).

Following the 2008 global financial crisis, central banks in advanced nations took various non-conventional measures such as large-scale term-loans to troubled financial institutions, outright asset purchases and interventions in credit markets. Those actions led to a surge in global liquidity.

The liquidity arising from monetary easing in advanced countries flowed into emerging economies, strengthening the interconnectedness between them. As a consequence of it, financial disruptions in one country or region would be no longer a problem of the country or region alone, the governor said.

Kim said that massive increases in official liquidity may have negative spillovers across sectors and national borders, noting that monetary policy is no panacea in this light.

The global financial crisis brought home the profound financial linkages across countries by manifesting themselves through volatile capital flows.

According to an IMF economist Mahvash Qureshi, capital flows to emerging economies peaked at 665 billion U.S. dollars in 2007, but those plummeted to less than 170 billion dollars in 2008 when the global financial crisis erupted. The figure resurged in 2010 as the global recovery got under way.

Following the U.S. sovereign rating downgrade, capital flows to emerging economies again dried up before resuming, but those have since been bouncing up and down, the economist said.