Global guidelines required for responsible monetary policy behaviour: Rajan

Reserve Bank of India (RBI) Governor Raghuram Rajan who is known for his criticism of unconventional’ monetary policies of central banks, has said that there should be guidelines for responsible monetary policy behaviour globally, as aggressive actions by one nation can lead to significant adverse cross- border spillovers on others. Rajan said that we can pretend all is well with the global monetary non-system and hope that nothing goes spectacularly wrong, or we can start building a system fit for the integrated world of the twenty-first century.

RBI governor in a working paper titled ‘Rules of Monetary Policy’ with Prachi Mishra, advisor, RBI, has suggested that aggressive monetary policy actions by one country can lead to significant adverse cross-border spillovers on others, especially as countries contend with the zero lower bound. If countries do not internalize these spillovers, they may undertake policies that are collectively suboptimal. Perhaps instead, countries could agree to guidelines for responsible behaviour that would improve collective outcomes.

He further suggested that policies that generally have positive or domestic effects could be rated green, policies that should be used temporarily and with care could be rated orange, and policies that should be avoided at all times could be rated red. Rajan has also stated in the paper that the temptation to shift costs can create inefficiencies when countries set their policies unilaterally.

However, noting that economic analysis of the issues is at an early stage, Rajan said it is unlikely 'we will get strong policy prescriptions soon, let alone international agreement on them, especially given that a number of country authorities like central banks have explicit domestic mandates'. Following the global financial crisis of 2008, many central banks in developed countries, had followed ‘unconventional monetary policies’ by keeping their policy rates close to zero for long periods to boost economic activity.