Noting that a period slow growth is dangerous, Reserve Bank of India Governor Raghuram Rajan on Saturday said structural reforms are the way to raise potential growth and can not be substituted by monetary policy.
He also called on multilateral organizations to “create new rules of the game” that will ensure that countries adhere to international responsibilities while trying to create conditions for sustainable growth.
“Structural reforms, typically ones that increase competition, foster innovation, and drive institutional change, are the way to raise potential growth,” he said while giving the keynote address at the Advancing Asia conference by the International Monetary Fund.
While one of the remedies to revive demand may be by writing off debt, he said it is debatable whether additional debt fuelled demand is sustainable. “At any rate, large-scale debt write-offs seem politically difficult even if they are economically warranted,” he noted.
But given the limited political room for structural reforms and substantial time lags before they pay off, he said that every country is looking for alternatives. However, the use of unconventional policies is questionable, he said.
“With interest rates already very low, and with pundits constantly reminding them that ‘inflation is always and everywhere a monetary phenomenon’ they have to go beyond ordinary monetary policy, or lose credibility and risk violating their domestic mandate…. No central banker can claim they are out of tools,” he said.
The RBI governor further said that though monetary policy works through the public’s expectations, more aggressive policy convinces the public that calamity is around the corner, it may tempt large segments to save rather than spend.
Further all monetary policies have “spillover” effects, he said, and called for a group of eminent international academics to 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 IMFC, the BIS and the G-20,” Rajan said.
“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 but cautioned that an international agreement may be difficult given that a number of country authorities like central banks have explicit domestic mandates.