Global economists: emerging markets should increase foreign reserves

Leading global economists warned that advanced countries` exit strategies can arouse huge confusion to financial markets in emerging markets including Korea. Concerns are heightening that advanced countries would soon exit from quantitative easing.

To avoid side effects of exit strategy promotion, central banks should strengthen alliance among each other and ramp up foreign currency reserves as a buffer for sudden capital outflow.

During the Bank of Korea International Conference 2013 held at the central bank`s headquarters in Seoul on Monday, Jean-Pierre Landau, former deputy governor of the Bank of France, said the impact of advanced countries` exit strategies can get more complicated than expected and cause heightening of global liquidity volatility. Joined by some 40 leading global economists, high-ranking officials at international organizations and central bank, the conference will take place through Tuesday under the theme of “Assessing Global Liquidity in a Global Framework."

Landau said the utmost priority is to build a stable and predictable system through policy cooperation in financial regulation and supervision. He criticized that most central banks have been promoting monetary policies for domestic purposes while being passive in international collaboration.

Liquidity unleashed by the U.S., Europe and Japan, which have promoted massive quantitative easing since the 2008 global financial crisis, has flown into emerging market economies. Under these circumstances, if advanced countries pursue an exit strategy, capital can massively flow out of emerging markets. Though joint international efforts are needed to avoid financial chaos, the currency wars engaged by certain countries make the cooperation difficult.

Critics said side effects toward emerging markets should be considered when advanced countries decide the time and method for an exit strategy.

In delivering opening speeches at the conference, Bank of Korea Governor Kim Choong-soo said, "If advanced countries carry out exit strategies, a sudden capital flow and chaos in international financial markets could occur," adding, "Plans should be sought via global alliance for co-prosperity of both advanced and emerging economies, while avoiding prioritizing national interests."

Many said other emerging markets including should ramp up foreign currency reserves to respond to potential financial market chaos that exit strategies can bring. At the Dong-A International Financial Forum 2013 held by the Dong-A Ilbo and its cable TV network Channel A on Friday, attendees said making efficient foreign assets operation is more necessary than unrealistic goals of internationalizing the Korean won or fostering global investment bankers.

Lee Chang-yong, chief economist at Asia Development Bank, said, "Asian policy authorities should note the possibility of potential risks in the banking sector triggering financial volatility when asset price trends shift (due to an end of easing monetary policy).

New York University Professor Thomas Sargent who won Nobel Prize in Economics in 2011 said securing global liquidity, an asset that can be used in international transactions, is a plan to respond to liquidity crises including a sudden stop (sudden suspension of foreign capital inflow), adding global liquidity acts as a role of insurance in avoiding risks of currency volatility.