Reserve Bank of India (RBI) governor Raghuram Rajan ran into a wall of resistance on Thursday when he urged some counterparts in developed economies to more formally consider the effects that their domestic stimulus has on emerging markets.
Alongside central bankers from the US, Europe, and Brazil, Raghuram Rajan took the stage at a high-profile event to list his proposals for better monetary cooperation and a global ‘safety net’ that could provide funds for countries in case of economic emergency.
He has grown increasingly vocal for change given how hard the currencies and stocks of emerging economies, such as India, have been rocked by big shifts in capital flows brought on by the unprecedented monetary accommodation in rich nations. “We should examine the situation and spillover effects, by all means empirically, to the extent we can,” Rajan said at the Brookings Institution. “This is not a healthy place,” he added.
Emerging markets absorbed a flood of investment in the wake of the global recession as central banks in developed nations sharply depressed interest rates, sending investors scrambling for higher yields in countries like Turkey, Argentina and India.
While the Bank of Japan and the European Central Bank could pump even more cash into global markets with pending bond-buying plans, the US Federal Reserve began this year to slow its money printing, causing headaches for policymakers like Rajan who saw emerging currencies tumble when the Fed first indicated bond purchases would be tapered.
Citing an International Monetary Fund report published on Tuesday, Rajan said the message is: “Industrial countries are going to do what they have to do; emerging markets have to adjust. I think we need language which is more even-handed,” added Rajan, a former IMF chief economist. “It’s not that emerging markets have infinite ability to adjust and, so, we should keep that in mind going forward.”
Seated with him on the stage, ECB vice president Vitor Constancio slightly shook his head. “I would not subscribe to the criticisms,” he said, noting that emerging economies were much closer to full employment than rich nations.
Constancio said past efforts at global coordination failed in part because emerging-market economies refused to accept that their currencies would have to appreciate in the face of policy easing in the developed world. The euro zone, for one, is struggling with high unemployment and low inflation, and last week opened the door to more stimulus. Advanced economies must “do the utmost