The RBI Governor Raghuram Rajan has once again called for a global co-ordination of monetary policies across all large country central banks.

“The current non-system in international monetary policy is, in my view, a source of substantial risk, both to sustainable growth as well as to the financial sector. It is not an industrial country problem, nor an emerging market problem, it is a problem of collective action. The sooner we recognise that, the more sustainable world growth we will have,” Rajan said addressing a conference on Monetary Policy in a Post-Financial Crisis Era in Tokyo, Japan.

Rajan, a former chief economist with the International Monetary Fund, said the key rationale for coordination and international monitoring is adverse policy spillovers. Sustained unconventional monetary policies pile up in the financial markets, where risk taking increases, without necessarily increasing real investment or consumption. And they spill over into foreign markets as capital flows lead to greater leverage and stronger exchange rates in recipient countries, and a shift in demand away from them.

He said, “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”, monitored by an impartial agency, to avoid unconventional policies with large adverse spillovers and questionable domestic benefits.”

The unconventional monetary policies meant both policies that hold interest rates at near zero for long, as well as balance sheet policies such as quantitative easing or exchange intervention.

Rajan also highlighted that the macroeconomic argument for prolonged unconventional policy in industrial countries is that it has low costs, provided inflation stays quiescent. Hence it is worth pursuing, even if the benefits are uncertain.

The RBI chief suggested that “at the very least, central banks reinterpret their domestic mandate to take into account other country reactions over time (and not just the immediate feedback effects), and thus become more sensitive to spillovers. This weak “coordination” could be supplemented with a re-examination of global safety nets.”

Central banks should not just worry about the immediate flows of capital to other countries from its policies, but the longer run reaction such as competitive easing or sustained exchange intervention that this would bring about. This would allow central banks to pay more attention to spillovers even while staying within their domestic mandate.

The international rules of the game need to be revisited as the world has changed. Both advanced economies and emerging economies need to adapt, else I fear we are about to embark on the next leg of a wearisome cycle, he added.

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