Ra­jan Sig­nals Emerg­ing Mar­kets May Hit Back With Own Ver­sion of QE

The Economic Times - - Markets & Finance - OUR BUREAU

Emerg­ing mar­kets may be­gin to re­tal­i­ate with mon­e­tary weapons of their own such as in­ter­ven­ing in ex­change rates if the cen­tral banks of the de­vel­oped world are not mind­ful of the harm they cause be­cause of their cheap money poli­cies, said the Re­serve Bank of In­dia gover­nor Raghu­ram Ra­jan. The un­con­ven­tional poli­cies pur­sued by the US Federal Re­serve and the Bank of Ja­pan may be help build risks in the fi­nan­cial mar­kets which when blows up could prob­a­bly lead to an­other cri­sis, he said. “Coun­tries could le­git­i­mately prac­tice what they might call quan­ti­ta­tive ex­ter­nal eas­ing or QEE, whereby they in­ter­vene to keep their ex­change rate down and build huge re­serves,” Ra­jan said at the In­sti­tute of Mon­e­tary and Eco­nomic Stud­ies-Bank of Ja­pan meet. “If we are un­will­ing to eval­u­ate all poli­cies based on their spillover ef­fects, there is no le­git­i­mate way mul­ti­lat­eral in­sti­tu­tions can de­clare that QEE con­tra­venes the rules of the game. Gover­nor Ra­jan has been among the most vo­cal pro­po­nents of the cen­tral banks of de­vel­oped na­tions to fac­tor in the spillover ef­fects of their loose mon­e­tary pol­icy on less de­vel­oped na­tions. In­deed, the for­mer Federal Re­serve chair­man Ben Ber­nanke had to pub­licly de­fend his poli­cies and say that he fac­tors in the views of emerg­ing mar­kets’ cen­tral bankers. Ra­jan even sug­gests a kind of a dis­pute res­o­lu­tion mech­a­nism such as a World Trade Or­gan­i­sa­tion to re­solve com­plaints again mon­e­tary pol­icy au­thor­i­ties. “In an ideal world, UMPs (un­con­ven­tional mon­e­tary poli­cies) such as QE or QEE should be vet­ted by an in­de­pen­dent mul­ti­lat­eral agency for their spillover ef­fects,” said Ra­jan. “For in­stance, fol­low­ing a com­plaint by an im­pacted coun­try, the in­de­pen­dent as­ses­sor could an­a­lyse the ef­fects of such poli­cies and come to a judge­ment on whether they fol­low the rules of the game.” Ra­jan, whose warn­ing of an im­pend­ing fi­nan­cial sec­tor cri­sis be­fore the hous­ing bub­ble in the US burst leading to a world­wide panic in fi­nan­cial mar­kets, is sig­nalling trou­ble. “The cur­rent non-sys­tem in in­ter­na­tional mon­e­tary pol­icy is, in my view, a source of sub­stan­tial risk, both to sus­tain­able growth as well as to the fi­nan­cial sec­tor,” he said. “It is not an in­dus­trial coun­try prob­lem, nor an emerg­ing mar­ket prob­lem; it is a prob­lem of col­lec­tive ac­tion. The sooner we recog­nise that, the more sus­tain­able world growth we will have.”

Un­con­ven­tional poli­cies pur­sued by the US Fed and the Bank of Ja­pan may be help­ing build risks in the fi­nan­cial mar­kets which when blows up could prob­a­bly lead to an­other cri­sis, Ra­jan said

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