On 10 November, Raghuram Rajan, Governor of the Reserve Bank of India, gave a talk on “Rules of the Game in the Global Financial System”. The lecture was jointly organized by the SAFE Policy Center, the Center for Financial Studies (CFS) and Deutsche Bundesbank. Jens Weidmann, President of the Deutsche Bundesbank, and Otmar Issing, President of the CFS, welcomed the speaker and the audience in Frankfurt.
In his speech, Rajan stated that global economic growth has remained low since the 2008 financial crisis and that there is high pressure on central banks around the world to foster more growth. After the crisis, many countries launched large fiscal stimulus programs to boost growth but these programs only worked temporarily, he said. Therefore, central banks decreased interest rates in order to encourage investments and demand. However, this measure had only limited success and, as interest rates hit the zero lower bound, unconventional monetary policy measures were implemented.
Rajan expressed the concern that these measures could create problems for financial stability in the future and that they cause large negative spillover effects to other countries. The countries were forced in a sort of prisoner dilemma, he said, because every country has to implement expansionary monetary policy measures in order to avoid negative effects from the expansionary monetary policy measures taken on elsewhere. No one will be able to end this policy on his own. All in all, the positive effects of this policy are only temporary while the negative effects will increase the longer this policy is implemented. Therefore, Rajan called for collective action by central banks to end unconventional monetary policy measures jointly.