IMF Gives Warnings about the Vulnerability of Developing Economies Because of Changing Monetary Policies of the United States

Published Date : Mar 23, 2015

The IMF chief, Christine Lagarde recently stated that the latest step being taken by the U.S. to tighten the monetary policy may have an adverse impact on some of the major emerging economies. This adverse impact can be attributed to the fact that such a development would be taking place at a time when most of the economies of the world are taking steps towards easing their respective monetary policies via banks and firms increasing their debts in terms of dollars. 

During a conference at the China Development Forum, Christine Lagarde expressed that the global economy is yet to reach a state of economic recovery, and this is because of factors such as low investments, high rate of unemployment, and high debt. Despite substantial growth of the U.S. economy in recent times and cheaper oil prices, global economic recovery still seems rather weak and fragile. According to her, the United States has plans of increasing the rates of interest at a time when there is a plethora of risks involved in the path to economic recovery. One of the main risks relates to the anticipated normalization or the tightening of the monetary policy of the United States in a situation wherein most countries are loosening thee monetary conditions. 

This type of monetary policy, which seems in a way a bit asynchronous, may bring about volatile conditions in the financial markets. The U.S. dollar is becoming stronger because of the diverging monetary policies. The vulnerability of the emerging markets can be attributed to companies and banks steeply increasing the amount of dollars borrowed by them over the last five years. Several policies that managed the global financial meltdown and also extended support to the economic recovery of the developed economies, mainly pertained to unconventional steps of monetary policy and steps such as huge and substantial government debt.