Rajan calls for more collective action

Raghuram Rajan during his speech at the Goethe University ©Jürgen Lecher
Raghuram Rajan during his speech at the Goethe University

Raghuram Rajan, Governor of the Reserve Bank of India, advocates a rapid exit from the ultra-accommodative monetary policy being pursued by many central banks. In a speech delivered at the Goethe University of Frankfurt am Main upon the invitation of the SAFE Policy Center, the Center for Financial Studies (CFS) and the Deutsche Bundesbank, Rajan asserted that massive purchases of government bonds ("Quantitative Easing"), such as those which have been and were still being practised by the Federal Reserve, the Bank of England or the EBCB, will not lead to sustainbly higher growth, but might have tremendous consequences. Structural reforms and investment in infrastructure are, in his view, necessary to improve the outlook for growth, in his view.

How to escape the prisoner’s dilemma

According to Rajan, sustained ultra-accommodative monetary policy puts central banks at risk of being trapped in a prisoner’s dilemma, in which, for an individual central bank, getting out is risker than staying in it along with the other central banks. He believes this could have tremendous consequences for financial stability. "We need to understand … and this is where I think we need to be a little careful about sustained unconventional monetary policy for long, the distortions get deeper and get harder to reverse. The benefits, I think, typically get smaller and smaller while the costs of continuing get larger."

Rajan believes that attempts to achieve higher growth through devaluation by means of competing monetary policy measures are particularly problematic. "We may be lapsing into policies that take growth from each other. We need to get out of these. The sooner we get out, the better," he said.

He sees more collective action as a way of escaping the dilemma, though he does not want this to be construed as coordinated monetary policy; rather, he feels that a fundamental consensus on the exit needs to be reached, even if the timing varies.

According to Rajan, an interest rate turnaround by an individual central bank in the current environment is likely to create greater price volatility. "I think there will be volatility but I think we have to bear it. I worry more about the consequences of staying in the ultra accommodative … world," he said.

At one with Weidmann and Issing

Jens Weidmann during his speech at the Goethe University ©Jürgen Lecher
Jens Weidmann during his speech at the Goethe University
At the event in Frankfurt, Bundesbank President Jens Weidmann likewise voiced concerns about an ultra-accommodative monetary policy. "I share the concerns regarding monetary policy that is too loose for too long," he said at a welcoming speech for Rajan. Weidmann also paid tribute to Rajan’s exceptional achievements as an academic and a monetary policymaker and stressed his role as a commuter between the academic community and the political arena.

In his speech, Weidmann also congratulated Rajan on his recent appointment to the post of Vice-Chairman of the Board of Directors of the Bank for International Settlements (BIS), also known as the "central bankers’ bank". The Bundesbank’s president has been Chairman of the Board of Directors since 1 November 2015.

In his introductory remarks, Otmar Issing, President of the Center for Financial Studies, called to mind Rajan’s seminal speech at the 2005 Jackson Hole conference, at which Issing, who was the European Central Bank’s chief economist at that time, was present. Rajan, then chief economist of the International Monetary Fund, presented a research paper on high risks in the financial system. Though received coolly by the economists in attendance, his words proved prescient when the financial crisis broke out two years later.

An outstanding economist and central banker

Raguram Rajan became Governor of the Reserve Bank of India in September 2013. At that time, the Indian economy was facing a severe crisis of confidence among investors; the rupee had fallen by more than 40% over a two-year period. A new clear stability-oriented policy stance provided impetus for the turnaround: Rajan shifted the central bank’s monetary policy focus towards the objective of price stability, thereby halting the rupee’s slide. Since he took office, inflation has fallen by more than 50% to its current level of 4.4%. Achievements such as this have – twice – earned him the "Central Banker of the Year" award.

Rajan also has a list of distinguished accomplishments as a scholar. Since 1995, he has been Professor of Finance at the University of Chicago Booth School of Business, where he is currently on leave. In 2003 he was the inaugural winner of the Fischer Black Prize awarded by the American Finance Association for original research to financial scientists under the age of 40.

He has also attracted attention as an author. His book "Fault Lines: How Hidden Fractures Still Threaten the World Economy" was the Financial Times/Goldman Sachs Business Book of the Year for 2010. "Saving Capitalism from the Capitalists," co-written with Luigi Zingales and published in 2003, describes the "narrow path between the Scylla of overweening government interference and the Charybdis of too little government support."