Reserve Bank of India Governor Raghuram Rajan called on Saturday for global central banks to adopt a system for assessing the wider impact of their actions, including unconventional monetary policies now in use.
Rajan proposed that a group of academics should measure and analyze the “spillover” effects of monetary policies and indicate which should be used and which avoided.
He suggested a traffic light system, grading policies green, orange or red.
The monitoring system could be implemented through an international agreement along the lines of the Bretton Woods currency accord or via the IMF, he said.
Rajan’s speech was the highlight of a three-day IMF event in New Delhi, attended by IMF managing director Christine Lagarde and Indian Prime Minister Narendra Modi, at which worries about the global economy were front and center.
“The international community has a choice,” Rajan said. “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.”
Rajan’s speech came days after the European Central Bank eased monetary policy further by cutting all its main interest rates, expanding asset purchases and launching a loan program which could see it pay banks to lend to firms and households.
The Bank of Japan has also taken interest rates into negative territory for the first time while the US Federal Reserve is expected to tighten monetary policy only gradually after years of near-zero rates and quantitative easing.
Rajan has been a vocal critic of such policies, saying central banks seeking to fulfill domestically focused mandates are ignoring the impact of their actions on the global economy.
Saturday’s speech was the most comprehensive given on the subject by Rajan, who is widely credited with having predicted the global financial crisis that began in 2007.
The former IMF economist, tipped by local media as a potential successor to Lagarde, also called on the IMF to take a lead role in ensuring policies adopted by its members do not have “beggar-thy-neighbor” consequences.
“We need new rules of the game, enforced impartially by multilateral organizations, to ensure countries adhere to international responsibilities,” he said.
Rajan warned that the kind of stimulus measures adopted by developed economies in recent years spook people into fearing “calamity is around the corner,” leading them to save rather than to spend and thus diminishing any benefits.
He has stated that India would not follow other countries and devalue its currency, a view endorsed by Modi.
Lagarde had advice of her own, urging Asian nations to employ growth-friendly monetary and fiscal policies to counter challenges posed by a fragile global economy.
Lagarde said structural reforms were needed in Asia, “the world’s most dynamic region” given its increasing importance to the global economy.
Asia already accounts for 40 percent of the world economy and stands to deliver nearly two-thirds of global growth over the next four years, Lagarde said.
“Given this vital economic role, making the most of Asia’s dynamism is of great interest to the entire world,” Lagarde said.
Lagarde cited examples including the need for China to rebalance its economy away from debt-led investment, the need for corporate governance reforms in Japan and for improvements in Indian infrastructure.
Strengthening the business environment and developing bond markets will be crucial across the region, she added.
Additional reporting by AFP
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