Raghuram Rajan floats 'traffic signal' like control on central bankers

Proposing 'traffic signal' like checks on central bankers, RBI Governor Raghuram Rajan on Tuesday asked them to shun monetary policies that can negatively impact other economies, saying even India can follow the same rules in about a decade.

"By the time any of this actually gets into policy, I have no doubt India will be among the top 3-5 global economies around 10 years from now and our monetary policy will also be subject to the same rules," he said.

Delivering a lecture at the London School of Economics, the former chief economist of International Monetary Fund (IMF) said the policies with zero-to-positive spillover effect for the rest of the world can be given 'green label', while those with negative potential impact for others should be labelled 'red'. Policies that are negative in short-term but can be positive in longer term can be given an orange label, he said.

Giving the 'driving analogy', the outspoken Governor also reiterated his call for "a more internationally responsible global monetary policy that follows rules of the game".

In his lecture, 'Rethinking the Global Monetary System', Rajan called on the world of academia to conduct deeper research and analysis on how such a system could work in a decade's time. "We need some element of international responsibility in setting of monetary policy... We need rules of the game based on how policies play out in the short term versus long term, will they have negative effects on the rest of the world or positive effects?" he said.

Explaining his 'driving analogy' at length, he said: "Policies that have a net positive impact on a country as well as zero to positive spillover effects for the rest of the world, let's give it a green label.

"Policies that are a little more uncertain, short-term negative but long-term positive, (are) more of an orange label. And policies that may be positive for your country but certainly negative for the rest of the world, now and for ever more, let's give it a red label and say countries should shun those kind of policies".

Admitting that the world is "nowhere near" establishing what these policies might be and what colours they could be branded under, the Indian central banker made a call out to the world of academia to step in.

"I am calling for a period of reflection, analysis and research so that we can improve on the global monetary system that we have, so that we have policies that are more globally optimal rather than just domestically optimal," Rajan said.

"We need a lot more work, we need studies of what policies have been beneficial and what policies have been harmful.Once we have a reasonable number of studies, we then move to international discussion and move to a context where we talk of rules of the game and international responsibility," he added.

"Today what you find in international fora is a lot of angst about the monetary policies that other countries are following but never any direct confrontation, because those policies are always ok because of the domestic mandate," he said, adding that it was time to start discussions.

"Rajan also warned that the adverse spillover effects of pursuing any aggressive monetary policy must be managed in time. We have to move away from a situation where anything goes... For that we need unbiased people in academic institutions doing analysis. Today the only policy that is prohibited internationally is sustained unidirectional intervention into exchange rate," he said.

His lecture, organised by LSE's Institute of Global Affairs, marked the launch of a new '100 Foot Club' initiative between the Indian High Commission in London and the LSE South Asia Centre. The name of the club alludes to the recent box-office hit '100 Foot Journey', which centres around bridging cultural divides.

"As I walked across from the High Commission to the LSE on my first visit about a month ago...I felt there was a possibility of using this club as a force multiplier on both sides. It is a large canvas to explore where academic research meets public policy," said Indian high commissioner to the UK Navtej Sarna, who introduced Rajan's lecture.

Rajan, on-leave Professor of Finance at the University of Chicago's Booth School, will be addressing students and academics during the course of his UK visit this week.