Wednesday 1 July 2015

Rajan's Great Depression Prediction and Begar Thy Neighbour Policy

Why is Raghuram Rajan's word important?

  • He predicted 2008 crisis in 2005.
What has he predicted in 2015?

  • He made a remark at a London Business School programme on intimations of the Great Depression
  • Raghuram Rajan said,“the question is are we now moving into the territory in trying to produce growth out of nowhere, we are in fact shifting growth from each other, rather than creating growth. Of course, there is past history of this during the Great Depression when we got into competitive devaluation.”
  • This ‘beggar-thy-neighbour’ strategy the Governor had referred to in his speech is what he termed ‘competitive monetary policy easing’— a likely product of the prolonged use of measures such as central banks holding interest rates at near zero, as well as policies that affect central bank balance sheets such as buying assets in certain markets so as to affect market prices.
What has RBI got to say on this?
  • RBI came up with clarification to put the Governor’s articulation in perspective and context.
  • RBI clarified,  “what Governor Rajan did say… was that the policies followed by major central banks around the world were in danger of slipping into the kind of beggar-thy-neighbour strategies that were followed in the 1930s… The Great Depression was a period of great turmoil, caused by many factors and not just beggar-thy-neighbour policies. Governor Rajan did not imply or suggest that there was any risk of the world economy, which is in steady recovery notwithstanding uncertainties like those in the Euro Area, slipping into a new Great Depression.”
What is Beggar-thy-neighbour strategy? (Important for us to know this term)
  • In economics, it is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries.
  • in this case Raghuram Rajan referred to ‘competitive monetary policy easing' as a case of beggar-thy-neighbour strategy
Solution as per Raghuram Rajan
  • “We need rules of the game in order to effect a better solution. I think it is time to start debating what should the global rules of the game be on what is allowed in terms of central bank action,” 
  • “The bottom line is that multilateral institutions like the IMF should re-examine the ‘rules of the game’ for responsible policy, and develop a consensus around new ones. No matter what a central bank’s domestic mandate, international responsibilities should not be ignored. The IMF should analyse each new unconventional monetary policy [including sustained unidirectional exchange rate intervention], and based on their effects and the agreed rules of the game, declare them in-or out-of-bounds,” 
Where does India stand?


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