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U.S. Federal Reserve chairman Ben Bernanke at the annual meetings of the IMF and World Bank in Tokyo, Saturday, Oct. 13, 2012. In remarks plainly aimed at China, Mr. Bernanke noted policy makers in some emerging countries ‘have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth.’KIM KYUNG-HOON/Reuters

The IMF-World Bank gathering in Tokyo last week offered two key story lines: A gloomy new forecast for a global economy facing an alarming rise in recession risk, and continued debate about the benefits of austerity. The International Monetary Fund, once famous for its stern demands for tough government austerity, now sees the need for balanced measures that foster growth and eschews a one-size-fits-all approach to debt management.

Indeed, IMF managing director Christine Lagarde declared that Greece may need a couple of more years to meet its debt targets and has even suggested – horror of horrors – that Greece's euro-zone partners may have to follow private-sector creditors and take a haircut on their Greek holdings. Needless to say, that suggestion did not sit well with the German contingent.

But another, much less publicized feud over central bank policies also emerged at the end of the meeting, featuring the IMF boss in one corner and U.S. Fed chief Ben Bernanke in the other. Ms. Lagarde, a former French finance minister, pointedly suggested that central banks should be paying more attention to the impact of their policy moves on other countries. "Given the cross-border spillover effects of monetary policy decisions, central banks may need to step up their international dialogue and co-operation," Ms. Lagarde declared. That sounds pretty mild, but it stems from sharp criticism in Brazil, China and some other emerging markets that the Fed's aggressive monetary easing is sending a new flood of unwanted hot money into the emerging world, inflating asset bubbles, undermining their own monetary policies and damaging trade prospects.

Mr. Bernanke, who was having none of this, mounted a passionate defence of Fed policy during a seminar Sunday in Tokyo and turned the tables on his critics. The Bank of Japan-IMF event was private, but the Fed was delighted to make his comments available.

"In particular, some critics have argued that the Fed's asset purchases, and accommodative monetary policy more generally, encourage capital flows to emerging market economies. These capital flows are said to cause undesirable currency appreciation, too much liquidity leading to asset bubbles or inflation, or economic disruptions as capital inflows quickly give way to outflows," Mr. Bernanke said in his prepared remarks.

"I am sympathetic to the challenges faced by many economies in a world of volatile international capital flows. And, to be sure, highly accommodative monetary policies in the United States, as well as in other advanced economies, shift interest rate differentials in favour of emerging markets and thus probably contribute to private capital flows to these markets. I would argue, though, that it is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies …"

In remarks plainly aimed at China, he noted that policy makers in some emerging countries "have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth. However, the perceived benefits of currency management inevitably come with costs, including reduced monetary independence and the consequent susceptibility to imported inflation. In other words, the perceived advantages of undervaluation and the problem of unwanted capital inflows must be understood as a package – you can't have one without the other."

And as the fine academic he is, Mr. Bernanke offered the academic solution to their perceived problem: "Of course, an alternative strategy – one consistent with classical principles of international adjustment – is to refrain from intervening in foreign exchange markets, thereby allowing the currency to rise and helping insulate the financial system from external pressures. Under a flexible exchange-rate regime, a fully independent monetary policy, together with fiscal policy as needed, would be available to help counteract any adverse effects of currency appreciation on growth. The resultant re-balancing from external to domestic demand would not only preserve near-term growth in the emerging market economies while supporting recovery in the advanced economies, it would redound to everyone's benefit in the long run."

Ms. Lagarde is undoubtedly eager to curry favour with key emerging countries, which have been none too fond of the costs of bailing out the advanced, if peripheral, economies of the euro zone. But when it comes to giving lessons on global economics and currency management, Mr. Bernanke is still running the class.

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