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Rajan criticises IMF, World Bank

April 11, 2014 08:02 IST

Reserve Bank Governor Raghuram Rajan criticised multilateral institutions like the IMF and the World Bank saying "they are not immune to cognitive capture".

Rajan, who himself had a stint as the chief economist of the International Monetary Fund (IMF) before taking over the mantle at the RBI, however, did not take names of Bretton Woods Institutions.

"The staff at multilateral institutions is excellent, and well capable of independent judgment. But political pressure subsequent to the initial assessment operates unevenly. Even if multilateral organisations become immune to power politics, they are not immune to cognitive capture," he said at the Brookings Institution in Washington.

Rajan, the academic-turned-central banker, who earned big name by predicting the 2008 financial crisis, said in an ideal world, multilateral bodies like the IMF and World Bank should vet unconventional monetary policies and assess them on their impact on world at large.

"The independent assessor could analyse the effects of such policies and come to a judgment on whether they follow the rules of the game. Policies where the benefits are largely domestic, while the costs fall largely abroad, would be especially carefully scrutinised," he said.

"If the assessor deems the policy reduces global welfare, international pressure should be applied to stop such policies," Rajan said in the speech titled 'Competitive Monetary Easing: Is It Yesterday Once More?'

He said initial assessments on the complaint of a smaller nation go unaltered while in case of a large nation complaining, the initial assessments are "toned down".

"Their staff has been persuaded by the same models and frameworks as the staff of industrial country central banks - models where monetary policy is an extremely powerful tool to elevate activity, and exchange rate flexibility does wonders in insulating countries from the most debilitating spillovers," he said.

India had suffered a great deal on the external front in the aftermath of the US Fed's commentary over withdrawing bond purchasing programmes. This led to blood bath forex markets, with rupee plunging to life-time low of 68-level in August last year.

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