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Case for global monetary harmony

Rajan: Joining forces

Mumbai, May 28: RBI governor Raghuram Rajan today called for greater co-ordination among central banks to deal with the spillover effect of unconventional monetary policies of developed economies on emerging markets.

Unconventional monetary policies such as holding interest rates at zero or the quantitative easing (QE) in the US had its impact in markets such as India.

“When source countries move to exit unconventional policies, some recipient countries are leveraged, imbalanced and made vulnerable to capital outflows. Recipient countries are not being irrational when they protest both the initiation of the unconventional policy as well as an exit whose pace is driven solely by conditions in the source country,” Rajan said at a conference organised by the Bank of Japan in Tokyo today.

According to Rajan, since the recipient countries become vulnerable to the exit or winding down of such policies, their domestic conditions should also be taken into account. This calls for more coordination in the monetary policies of various central banks.

“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,” he said.

However, given the difficulties of operationalising the strong form, Rajan suggested that central banks should “reinterpret” their domestic mandate to take into account other country’s reactions and become more sensitive to spillovers.

The RBI governor also made a case for setting up strong international safety nets to discourage countries from accumulating huge foreign exchange reserves.

 
 
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