Easy monetary policy not right medicine: Rajan

Reserve Bank Governor Raghuram Rajan on Thursday said a very accommodative monetary policy can lead to more problems for an economy rather than help sustain growth.

“A first step to prescribing the right medicine is to recognise the cause of the sickness. Extreme monetary easing, in my view, is more cause than medicine,” Rajan said at Brookings Institution function in Washington.

 

“The sooner we recognise that, the more sustainable world growth we will have,” he said.

 

Rajan also reiterated his call, first made at the G20 summit in Sydney in February, for more coordinated monetary policy actions between advanced and emerging economies so as to avoid the spillover effects.

 

He also criticised multilateral institutions like IMF for supporting such extremely loose monetary policies, saying “official statements by multilateral institutions such as the IMF continue to endorse unconventional monetary policies while downplaying the adverse spillover effects to other countries”.

 

He also quoted IMF’s own Jonathan Ostry and Atish Ghosh, who argued that impartial international policy assessments by multilateral entities could be suspected of bias.

 

“When source countries move to exit unconventional policies, some recipient countries are leveraged, imbalanced, and vulnerable to capital outflows,” Rajan said.

 

He said as investment managers anticipate consequences of the future policy path, even a measured pace of exit may cause severe market turbulence and collateral damages.

 

“The more transparent and well-communicated the exit is, the more certain the foreign investment managers may be of changed conditions, and the more rapid their exit from risky positions,” he said. 

 

“My call is for more coordination in monetary policy because I think it would be an immense improvement over the current international non-system.

 

“International monetary policy coordination, of course, is unpopular among central bankers, and I therefore have to say why I reiterate the call and what I mean by it,” Rajan said.

 

He, however, said he did not mean that central bankers should sit around a table and make policy collectively, nor does he mean they call each other regularly and coordinate actions.

 

“In its strong form, I propose that large country central banks, both in advanced countries and emerging markets, internalise more of the spillovers from their policies in their mandate, and are forced by new conventions on the ‘rules of the game’ to avoid unconventional policies with large adverse spillovers and questionable domestic benefits,” he said.

 

The Governor suggested that, at least the central banks should reinterpret their domestic mandate to take into account other country reactions over time, and become more sensitive to spillovers.