“INTERNATIONAL policy co-ordination is like the Loch Ness monster,” Olivier Blanchard and Jonathan Ostry of the IMF wrote recently. It is “much discussed but rarely seen”. The oddity was sighted in New York in 1985, when the big economies conspired to weaken the dollar. It resurfaced two years later in Paris, when they decided to stop the greenback’s fall. Some also claim to have witnessed it in Washington in 2008, when the G20 group of big economies agreed to fight the financial crisis with simultaneous fiscal stimulus.

The G20’s finance ministers and central bankers will meet again in Sydney later this month. As they gather, some prominent economists think international co-ordination is due another appearance. They argue that the rich world’s central banks are wrong to ignore the side effects of their policies on emerging economies. By easing monetary policy so aggressively after the crisis, these central banks obliged global capital to hunt for higher yields in emerging economies. Now that America’s Federal Reserve is easing back on its easing, capital is flowing out again, leaving emerging economies in some turmoil.

The hopes for co-operation are likely to be dashed. But they are nonetheless interesting. They mark a break from the consensus view that international co-operation is not terribly helpful—and not in the least practical. According to this view, emerging economies can take control of their own monetary fate by the simple trick of letting their currencies float. They can untie themselves from the Fed by untying themselves from the dollar.

In the past decade many emerging economies heeded this advice, working hard to overcome their fear of floating. Their central banks have shown more grit in the fight against inflation and gained credibility for doing so. Thus when the currency falls, a one-off jump in import prices tends not to result in ongoing price-wage spirals. Emerging economies have also deepened their financial markets and persuaded foreigners to lend to them in their own currencies, narrowing the “currency mismatch” between their assets and liabilities. Thus when their exchange rates slide, the value of their foreign debt no longer rises to unbearable levels, as it did during the Asian crisis.

But the turmoil of the past nine months has posed a stiff test of this new-found currency courage. Emerging markets that no longer fear floating are still petrified of plunging. Central banks in the worst-hit countries have felt compelled to raise interest rates, fearful that exchange-rate tumbles will contribute to mounting price pressures. And contrary to mainstream theory, a cheapening of the currency is not always enough to entice back foreign buyers. Exchange-rate falls have instead prompted renewed selling by investors hoping to escape any further depreciation.

Emerging economies are also vulnerable to new kinds of currency mismatch, according to Hyun Song Shin of Princeton University. In recent years their multinational companies have borrowed dollars offshore via overseas subsidiaries. As international borrowing costs have risen, they have fled the offshore market and turned their attention back home, withdrawing local deposits, borrowing from local banks and cutting capital outlays. Thus Fed policy can hurt an emerging economy even if its residents (as opposed to its offshore subsidiaries) are free of foreign-currency debt and no capital actually leaves the country.

At Nessie’s mercy

If emerging economies remain dependent on the Fed, should the Fed bear its dependents in mind when it sets monetary policy? Such solidarity is almost impossible to imagine. The Fed is obliged by law to pursue solely domestic objectives. It will take note of emerging-market troubles only if they threaten those national goals. And thus far they don’t, said Janet Yellen, the Federal Reserve’s new chairman, in testimony to Congress this week.

Faced with the Fed’s unilateralism, emerging economies may take unilateral steps of their own to protect themselves. When capital next floods into emerging markets, they may impose limited controls on inflows, akin to the taxes Brazil imposed on foreign bond and share purchases in 2009. Such controls will, however, deflect capital to other economies. These bystanders may then impose their own limits. The result could be a capital-controls “arms race”, according to Anton Korinek of Johns Hopkins University, which would be damaging if those controls are clumsy. Such capital controls—a response to Fed unilateralism—might then create the need for multilateralism of another kind. Countries engaged in an arms race might seek the equivalent of “mutual disarmament”. Everyone would ease their controls a notch or two, preserving the same pattern of flows between them, but without as much costly weaponry.

In principle, co-operation could go further, argue Mr Ostry and Atish Ghosh of the IMF. Policymakers in rich countries could tax risky capital flows at their point of departure, even as policymakers in emerging markets taxed them at their point of arrival. As John Maynard Keynes once noted, controls are more effective if “movements of capital can be controlled at both ends”.

The emerging-market turmoil of the past nine months may renew interest in such measures. But what works in theory rarely works in practice. The rich world is unlikely to help the emerging markets enforce their capital controls any more than it will set monetary policy with their interests at heart. Certainly, if the advocates of international co-operation are hoping to see it in Sydney and not just talk about it, the omens are not good. According to Gary Campbell, president of the Loch Ness Monster fan club in Inverness, the number of monster sightings has dwindled since the turn of the century. Last year was the first since 1925 without anyone spotting it at all.

Economist.com/blogs/freeexchange