SAIF • CAFR Distinguished Speaker Series
January 14, 2017
Dr. Raghuram Rajan, Professor of Finance at the University of Chicago,
former President of the Reserve Bank of India and former Chief Economist
of International Monetary Fund (IMF), shared his views on rules of
monetary game at the SAIF-CAFR Distinguished Speakers Series to a
roomful audience of over 400 scholars and practitioners on January
14th, 2017.
According to Dr. Rajan, though the communication between central banks
is complicated and the existing international environment doesn’t
facilitate the achievement of global protocols, it is essential to
introduce new rules of monetary policy, in order to include potential
spillover effect in the framework of decision-making, without
compromising the interest of other economies in exchange of domestic
growth.
“Once the currency of an emerging market drops, due to lack of the same
credibility as the Federal Reserve, European Central Bank and Bank of
Japan, the market is concerned of further depreciation, which leads to
the self-fulfilling effect. Probably the intervention of exchange rate
is the best and the most realistic vehicle, yet it is not permitted by
prior rules,” highlighted Dr. Rajan.
In his opinion, developed and developing economies follow different
rules in the current context. However, due to its spillover effect, a
matured economy needs to take account of international responsibility in
its policymaking framework. Therefore, it is vital to create new game
rules built on a number of implicit rules.
Dr. Rajan proposed to classify monetary policies into three levels of
rating, namely Green, Red and Orange, resembling the implications of
traffic light.
A Green Policy imposes positive effects on both domestic and
international economies. Such policies shall be encouraged by the global
community and may include,, for example, the conventional monetary
policies that simultaneously drive local and international demands, or
the policies that will significantly improve local economy but have
only temporary adverse spillovers on other countries
A Red Policy shall be avoided at all times. Though it creates positive
effect on the local economy in short run, it has large negative effect
on foreign growth, which leads to negative net effect.
In contrast, an Orange Policy can be carefully implemented in short
term but not on sustainable basis. It is important to take account of
its short- and long-run results.
In summary, the appropriate policymaking framework shall consider the
timing, the stage of business and financial cycle and its short- and
long-term effects on both domestic and foreign economies.