Speaking at the Advancing Asia summit in New Delhi, Rajan also said that the larger economies needed to be more aware of the risks involving their monetary policies, which almost always focus inwards and tend to overlook the spillover effect on the smaller economies.
“Given the importance of spillovers from monetary policies, especially in the face of low inflation globally, it is important we start building a global consensus on how to get better outcomes for the world,” Rajan said.
“As central bankers flirt with ever more unconventional policies, it is worth asking if these policies really move the economy towards the desired objective,” he added.
The governor said that monetary policies had external spillover effects but that did not mean they were all justified. What mattered was the net spillovers. “One source of spillovers is through the trade channel, the relative magnitude of demand creating-versus-demand switching effects. Another source of spillovers is through cross-border capital flows, and their effect on financial stability elsewhere,” he said.
“In the current state of affairs, industrial country central banks find all sorts of ways to justify their policies in international fora, without acknowledging the unmentionable — that the exchange rate may be the primary channel of transmission, and that adverse capital flow spillovers may be sizeable.”
He said monetary policies of certain countries have adverse impact globally but there has been no open discussion on this.
“And so this is the unmentionable monetary policy we don’t talk about. We have veil language often — sometimes more explicit. But this is the big source of effects in the global economy. I think it is time we brought it out in the open and talked about it without necessarily being on the defensive but trying to understand better what the longer-run effects are whether they are moving us to the right direction,” he said.
“As consensus builds on the rules of conduct, we can contemplate the next step of whether to codify them through international agreement, see how the articles of multilateral watchdogs like the IMF will have to be altered, and how country authorities will interpret or alter domestic mandates to incorporate international responsibilities.”