Reserve Bank of India governor Raghuram Rajan was one of the few senior economists credited with seeing the 2008 financial crisis coming.
So when he says the world is making a policy mistake that it did during the Great Depression, people are likely to take note.
According to India’s Economic Times, Rajan made the following statement at London Business School:
“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.”
He went on:
“We have to become more aware of the spill-over effects of our actions and the rules of the game that we have — of what is allowed and what is not allowed — needs to be revisited.”
Rajan has warned before about the lack of co-ordination between the expansionary policies of central banks around the world. The specific period in history he’s referencing here is the competitive devaluation (sometimes called a currency war) that was seen after countries came off the gold standard in the 1930s.
Devaluing a currency, which was no longer pegged to the value of gold, became a quick and easy way to get an economic boost, benefiting that country’s exporters. But that prompted something of an arms race, with countries racing to devalue ahead of each other.
There are no specific currencies mentioned, but Rajan might well be thinking of the recent slump in the value of the euro, which has declined nearly a fifth in dollar terms since April last year. He might also be thinking of the Japanese yen, which has dropped by more than a quarter against the dollar since the election of Prime Minister Shinzo Abe, who promised fiscal and monetary stimulus.
Those are factors that have weighed on the Federal Reserve as it decides when to hike interest rates for the first time since the crisis.
Rajan also undoubtedly has concerns about the effects of monetary policy in advanced countries on emerging markets like India. In February he complained that “when elephants fight the grass suffers.”
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