India’s Rajan Calls for More International Monetary Cooperation

The governor of India’s central bank, Raghuram Rajan, called for better international coordination among the world’s central banks, saying the Federal Reserve is paying insufficient attention to the ripple effects that its exit from today’s ultra-easy monetary policy will have on emerging markets.

Speaking Thursday at the Hutchins Center on Fiscal and Monetary Policy at Brookings, Gov. Rajan urged the Fed and other major central banks to reinterpret and broaden their mandates, now largely defined in domestic terms, to take into account the effect their policies will have on others.

“This would mean,” he said in remarks prepared for delivery, “that while exiting from unconventional monetary policies, central banks would pay attention to conditions in emerging markets [in] deciding the timing of moves while keeping the overall direction of moves tied to domestic conditions.”

The Fed’s decision in September 2013, although made for domestic reasons, to delay scaling back its purchases of long-term bonds gave emerging economies time to prepare for the eventual tapering move, which came in December, and didn’t disrupt markets, he noted. In contrast, he criticized the Fed for failing to mention turmoil in emerging economies in its January 2014 policy statement, sending “the probably unintended message that those markets were on their own,” a sentiment reinforced by public comments by regional Fed bank presidents.

Gov. Rajan, on leave from the University of Chicago, said he saw merit in assigning the International Monetary Fund or a similar institution the responsibility of assessing the spillover effects of major central banks policies – much as the World Trade Organization does with trade rules – but acknowledged this isn’t politically viable. He endorsed stronger international safety nets to provide liquidity to individual countries when the Fed or other central banks trigger major shifts in global financial markets.

Responding to Gov. Rajan’s remarks were Charles Evans, president of the Federal Reserve Bank of Chicago; Vitor Constancio, vice president of the European Central Bank; Alexandre Tombini, governor of Brazil’s central bank, and Eswar Prasad of Brookings.