“While the jury is still out on the effects of unconventional monetary policy on the domestic economy, it seems fair to say that the benefits seem to be diminishing after years of effort, and the costs increasing,” he said at the IMF/Indian government-organised Conference on Advancing Asia: Investing for the Future.
If structural impediments are the primary cause of slow growth, then the question is does not the unconventional monetary policy takes the pressure off politicians to undertake the needed policy actions, he said. The Reserve Bank of India governor held central bankers of industrial countries know that monetary policy cannot substitute for structural reforms and elevate growth potential.
On the spillover effect of monetary policies, he said have external spillover effects, and those generally seen to have few adverse spillovers and to be encouraged by the global community should be rated ‘green’. Policies that should be used temporarily and with care could be rated ‘orange’, and those should be avoided at all times could be rated ‘red’.
To establish such ratings, the effects of any policy have to be seen over time, rather than at a point in time, he added.
“If a policy has positive effects on both home and foreign countries, and therefore on global welfare, it would definitely be rated green. Conventional monetary policy would typically fall in this category, as it would raise output in the home economy, and create demand for exports from the foreign economy,” Rajan said.
“A green rating for such policies would, however, assume that the stage of the financial and credit cycle in the home and foreign economies is such that financial stability risks from low interest rates are likely to be limited,” he added.
On the issue of who should measure and analyse spillovers, what would be an appropriate forum to discuss spillover effects from specific policies, and the ratings of these policies, Rajan said a start can be made with a group of eminent academics with reasonable representation across the globe, and have them measure and analyse the spillovers, and grade policies.
Perhaps the next step would be an agreement to discuss policies and their international spillover effects at meetings such as those of the IMF Board, the International Monetary and Financial Committee, the G-20 and others, he said. The discussion would be based on background papers, which would be commissioned from both traditional sources like the IMF, as well as non-traditional sources like the group of academics and central banks.
“Given the importance of spillovers from monetary policies, especially in the face of globally low inflation, it is important we start building a global consensus on how to get better outcomes for the world,” he said.
“Such a discussion need not take place in an environment of finger pointing and defensiveness, but as an attempt to understand what can be reasonable, and not overly intrusive, rules of conduct,” Rajan said.
As consensus builds on the rules of conduct, one can contemplate the next step of whether to codify them through international agreement, see how the articles of multilateral watchdogs like the IMF will have to be altered, and how country authorities will interpret or alter domestic mandates to incorporate international responsibilities, he added.
The international community has a choice, he noted.
“We can pretend all is well with the global financial non-system and hope that nothing goes spectacularly wrong. Or we can start building a system for the integrated world of the 21st century. I do hope we can consider some initial steps,” he said. (IANS)