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, Reserve Bank of India (RBI) governor Raghuram Rajan has said.
“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 internalise 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,” Rajan said in a working paper titled “Rules of Monetary Policy”.
The paper, authored by Rajan and Prachi Mishra, adviser, RBI, has been posted on the central bank’s website.
The pressure to avoid a consistent breach of the lower inflation bound and the need to restore growth to reduce domestic unemployment could lead to unconventional monetary policies, he added. “The bottomline is that simply because a policy is called monetary, unconventional or otherwise, it may not be beneficial on net for the world. That all monetary policies have external spillovers does not mean that they are all justified. What matters is the relative magnitude of demand creating versus demand switching effects, and the magnitude of other net financial sector spillovers, that is, the net spillovers.”
Rajan has been sounding his concern over such beggar-thy-neighbour policies and its spillover effects in various speeches. Beggar-thy-neighbour refers to a policy that aims to address a nation’s own domestic problems at the expense of others, largely through competitive devaluation of their currencies.
Monetary policy could be broadly characterised and rated based on analytical inputs and discussion, Rajan said. “Policies that 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.”