There are few areas of robust growth around the world, with the IMF repeatedly reducing its growth forecasts in recent quarters. "This period of slow growth is particularly dangerous because both industrial countries and emerging markets need high growth to quell rising domestic political tensions. Policies that attempt to divert growth from others rather than create new growth are more likely under these circumstances. Even as we create conditions for sustainable growth, we need new rules of the game, enforced impartially by multilateral organizations, to ensure countries adhere to international responsibilities," said the RBI Governor Raghuram Rajan in his opening remarks at the Economic Club of New York on Tuesday.
Unconventional monetary policies include both policies where the central bank attempts to commit to hold interest rates at near zero for long, as well as policies that affect central bank balance sheets such as buying assets in certain markets, including exchange markets, in order to affect market prices.
There clearly is a role for unconventional policies - when markets are broken or grossly dysfunctional, central bankers may step in with their balance sheets to mend markets. The key question is what happens when these policies are prolonged long beyond repairing markets to actually distorting them. The benefit to cost ratio there is less clear, the RBI Governor said.
"If UMP enhances financial risk taking in the originating country without enhancing domestic investment or consumption, the exchange rate impact of UMP may simply shift demand away from countries not engaging in UMP, without creating much compensating domestic demand for their goods. If so, UMP would resemble very much the exchange rate intervention policies of the emerging markets pre-global financial crisis," Rajan said.
In an ideal world, the political imperative for growth would not outstrip the economy's potential, the Governor said. "Given that we do not live in such a world, and given that social security commitments, over-indebtedness, and poverty are not going to disappear, it is probably wiser to look for ways to enhance sustainable growth."
Clearly, the long run response to weak global growth should be policies that promote innovation as well as structural reforms that enhance efficiency. Given that growth within countries is poorly distributed, policies that improve the domestic distribution of capabilities and opportunities without significantly dampening incentives for innovation and efficiency are also needed, Rajan added.
