NEW DELHI/MUMBAI Reserve Bank of India governor Raghuram Rajan called on Saturday for global central banks to adopt a system for assessing the wider impact of their actions, including unconventional monetary policies now in use.
At an International Monetary Fund event in New Delhi, Rajan proposed that a group of academics should measure and analyze the "spillover" effects of monetary policies and indicate which should be used and which avoided. He suggested a traffic light system grading policies green, orange or red.
The monitoring system could be implemented through an international agreement along the lines of the Bretton Woods currency agreement or via the IMF, whose chief Christine Lagarde also attended the event.
"The international community has a choice," Rajan said. "We can pretend all is well with the global financial non-system and hope that nothing goes spectacularly wrong. Or we can start building a system for the integrated world of the 21st century."
Rajan's speech comes days after the European Central Bank eased monetary policy further by cutting all its main interest rates, expanding asset purchases and launching a loan program which could see it pay banks to lend to firms and households.
The Bank of Japan has taken its interest rates into negative territory for the first time while the U.S. Federal Reserve is expected to tighten monetary policy only gradually after years of near-zero rates and quantitative easing.
Rajan has been a vocal critic of such policies, saying central banks seeking to fulfill domestically focused mandates are ignoring the impact of their actions on the global economy. These include the prospect of currency wars and volatility in investment flows to emerging markets.
Saturday's speech was the most comprehensive given on the subject by Rajan, who is widely credited with having predicted the global financial crisis that began in 2007.
The former IMF economist tipped by local media as a potential successor to Lagarde also called on the Fund to take a lead role in ensuring policies adopted by its members do not have "beggar-thy-neighbour" consequences.
"We need new rules of the game, enforced impartially by multilateral organizations, to ensure countries adhere to international responsibilities," he said.
(Additional reporting by Neha Dasgupta; Editing by Catherine Evans)
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