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SEOUL - Exit from quantitative easing in the United States will not be a big problem in terms of theory, a Nobel laureate said Monday, downplaying concerns that the earlier-than-expected shutdown of bond purchasing program may cause negative side effects in emerging countries such as abrupt reversal of capital flow.
"Quantitative easing is a policy in the United States, which is unprecedented and experimental," Thomas J. Sargent, a 2011 Nobel laureate in economics and a professor of economics and business at New York University and Seoul National University, told reporters in Seoul on the sidelines of a conference hosted by the Bank of Korea (BOK).
Sargent said there was no past data appropriate for predicting the possible effect from the exit strategy, noting that the potential consequences from the exit should be estimated based on theories.
Citing Adam Smith, the Nobel laureate said that the exit in the US "really doesn't make much difference" in terms of theory, stressing that "it's not gonna be a problem."
His comments dismissed widespread worries that the earlier-than-expected exit in the US would dry up liquidity in the global financial market. Federal Reserve Chairman Ben Bernanke hinted that the Fed's bond purchases may be scaled back within this year depending on the economic data.
"When advanced economies implement their exit strategies, global liquidity condition could tighten rapidly, resulting in asymmetric spillover effects," BOK Governor Kim Choong-soo said in a welcoming address for the conference.
Kim noted that the implementation of exit strategies by individual countries might trigger sudden capital outflows and global financial market turmoil, stressing over the importance of policy coordination among central banks to minimize such adverse effects.
Aggressive quantitative easing was conducted in major economies to tackle the global crisis, moderate the global economic recession and stabilize international financial markets in the post-crisis era, Kim said, adding that it was the intended consequences.
The governor, however, cautioned over the continued quantitative easing by key currency countries, saying that it "brought in its train unintended negative externalities" in forms such as the accentuated vulnerability of emerging economies.
Other participants at the conference joined Kim in worrying about the negative side effects from the exit strategy.
"Advanced economies are of the view that unconventional expansionary monetary policy stabilizes financial markets and promotes growth, therefore its global effects must be positive," said Rhee Changyong, a chief economist at the Asia Development Bank (ADB).
"On the other hand, emerging economies are concerned about its negative spillover effects on their capital flows, exchange rates and asset prices," said Rhee.
According to the empirical analysis by Rhee, quantitative easing in major economies boosted fluctuation of capital flows in emerging economies. Aggregate capital inflows to 10 large regional economies, including China, India, Japan and South Korea, plummeted to 1.7 percent of GDP for two years to 2009 from an average of 8.4 percent in the prior three years before jumping to 7.8 percent during the 2010-2012 period.
Sharp swing of capital flows during the global crisis was mainly driven by portfolio investment such as stock and bond trading, Rhee said, noting economies with more open and developed capital market experienced greater swings in portfolio investment.