Rajan Urges Reassessment of Stimulus Impacts on Emerging Markets

Central banks in developed economies must do more to assess the impact of their stimulus on other nations, to prevent build-up of global financial and economic risks, Reserve Bank of India Governor Raghuram Rajan said.

While there is need for near-zero interest rates or asset purchases by monetary authorities in countries where markets are “broken” or deflationary expectations are strongly entrenched, such as Japan, maintaining such policies when the markets have been repaired holds risks, Rajan said in a panel discussion in Tokyo today. Prolonged stimulus could trigger currency devaluations or competitive easing in other nations, he added.

“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,” Rajan said, according to an e-mailed copy of the comments. “It is not an industrial country problem, nor an emerging market problem, it is a problem of collective action.”

Rajan had sparred with former Federal Reserve Chairman Ben Bernanke last month over how much international policy cooperation is needed. The Fed considers developments in emerging markets when formulating policies, Bernanke had said.

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