Competitive monetary easing: is it yesterday once more?

Abstract

Given weak post-crisis aggregate demand both advanced economies and emerging economies engage in competitive monetary easing, creating financial risks. To ensure stable and sustainable growth, the international rules of the game need to be revisited. Since internalizing spillovers to other countries may be difficult, large central banks could reinterpret their domestic mandate to take into account other country reactions over time (and not just the immediate feedback effects) and thus become more sensitive to spillovers. This weak ‘coordination’ could be supplemented with improvement of global safety nets.

Keywords:

• competitive monetary easing
• international rules of the game
• spillovers
• safety nets

Notes

1. Based on remarks by Dr Raghuram G. Rajan, Governor, Reserve Bank of India at the Brookings Institution, 10 April 2014.

2. See Borio and Disyatat (2009) for an excellent early comprehensive taxonomy and assessment of balance sheet policies.

3. I was not a member of the fraternity at that time, so I do not feel a conflict in doling out praise!

4. ‘A step in the dark: unconventional monetary policy after the crisis’, Raghuram Rajan, Andrew Crockett Memorial Lecture delivered at the BIS on 23 June 2013.

5. See Borio (2014), Borio and Disyatat (2009), Stein (2013), though see Chodorow-Reich (2014) for an alternative viewpoint. One question about Chodorow-Reich’s assessment that quantitative easing does not, by and large, prompt risk-taking is that he uses market prices to estimate effects, even though these prices themselves could be distorted by risk-taking.

6. For evidence, see for example Becker and Ivashina (2013), Bruno and Shin (2014, forthcoming), Ioannidou, Ongena, and Peydró (2009), Maddaloni and Peydró (2010).

7. See Diamond and Rajan (2012), Farhi and Tirole (2012) and Acharya, Pagano, and Volpin (2013). The problem is exacerbated if unemployment is driven by factors that move to a different cycle and pace than the financial cycle.

8. Though see Caruana (2012), Eichengreen et al. (2011), Jeanne (2014), and Taylor (2013) for proposals by current and former policy-makers and monetary economists.

9. See Eichengreen et al. (2011). For an articulation of the doctrine, see Rose (2007) or Taylor (2013).

10. See Rodrik (2008) on why exchange undervaluation may be essential for emerging economies.

11. See Ostry and Ghosh (2013) for the idea of an independent assessor.

12. For a recent nuanced view from a key Fed President, see Dudley (2014).

13. See Farhi, Gourinchas, and Rey (2011) for comprehensive proposals, as also Prasad (2014).

14. So as to give a country time to adjust policies to qualify for higher limits, or to find alternative arrangements.

15. See ‘The Fund’s Mandate – The Future Financing Role: Reform Proposals’, IMF 29 June 2010.

16. For an interesting episode, see the farm mortgage crisis in the United States documented by Rajan and Ramcharan (2013).

Additional information

Notes on contributors

Raghuram Rajan

Dr Raghuram Rajan is currently the Governor of The Reserve Bank of India, on leave from the University of Chicago, where he is the Distinguished Service Professor of Finance at the Booth School. Dr Rajan was earlier the Chief Economist and Director of Research at the International Monetary Fund. He is the recipient of many awards, including the inaugural Fischer Black Prize for the best finance researcher under the age of 40. His book ‘Fault Lines: How Hidden Fractures Still Threaten the World Economy’ was awarded the Financial Times-Goldman Sachs prize for best business book in 2010.