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Containing Competitive Monetary Easing

In a world where debt overhangs and the need for structural reform are constraining domestic demand, unconventional monetary policies have profound spillover effects – and prompt damaging responses. The only way to break the destabilizing cycle of monetary expansion and retaliation is to increase global monetary-policy coordination.

MUMBAI – As the world struggles to recover from the global economic crisis, the unconventional monetary policies that many advanced countries adopted in its wake seem to have gained widespread acceptance. In those economies, however, where debt overhangs, policy is uncertain, or the need for structural reform constrains domestic demand, there is a legitimate question as to whether these policies’ domestic benefits have offset their damaging spillovers to other economies.

More problematic, the disregard for spillovers could put the global economy on a dangerous path of unconventional monetary tit for tat. To ensure stable and sustainable economic growth, world leaders must re-examine the international rules of the monetary game, with advanced and emerging economies alike adopting more mutually beneficial monetary policies.

To be sure, there is a role for unconventional policies like quantitative easing (QE); when markets are broken or grossly dysfunctional, central bankers need to think innovatively. Indeed, much of what was done immediately after the collapse of US investment bank Lehman Brothers in 2008 was exactly right, though central bankers had no guidebook.

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