Reserve Bank of India Governor Raghuram Rajan on Thursday called for more global coordination in monetary policy and the creation of a global “safety net” administered by a multilateral body such as the International Monetary Fund (IMF) to tackle economic emergencies. Rajan made the comments in the context of the US Federal Reserve having increased the pace of withdrawal from quantitative easing this year.
In a world where international liquidity can dry up quickly, the world needs bilateral, regional, and multilateral arrangements for liquidity, Rajan said while addressing the Brookings Institution in Washington.
“Swap arrangements can be channeled through multilateral institutions like the IMF instead of being conducted on a bilateral basis, so that the multilateral institution bears any (small) credit risk, and the source central bank does not have to justify the arrangements to its political authorities,” he said.
In another significant proposal, Rajan mooted the formation of an independent assessor as unconventional monetary policies such as QE or QEE should be vetted for their spillover effects.
“The assessment procedure is easy to visualise,” he said. Following a complaint by an impacted country (as in the WTO), the independent assessor could analyse the effects of such policies and come to a judgment on whether they follow the rules of the game, he said.
On the need for more co-ordination, he said, “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, and are forced by new conventions on the “rules of the game” to avoid unconventional policies with large adverse spillovers and questionable domestic benefits”.
“I do not mean that central bankers sit around a table and make policy collectively, nor do I mean that they call each other regularly and coordinate actions,” Rajan said.
“Given the difficulties of operationalising the strong form, I suggest that, at the very least, central banks reinterpret their domestic mandate to take into account other country reactions over time, and thus become more sensitive to spillovers,” he added. This weak “coordination” could be supplemented with a re-examination of global safety nets, he said.