Reserve Bank of India (RBI) governor Raghuram Rajan has called for a new Bretton Woods-like agreement to prevent central banks from adopting policies that distort the global financial system by adopting policies that undermine the financial systems of other countries.
Rajan was referring to policies of central banks in developed countries like the US Federal reserve and the Europen Central Bank, which find various ways to justify their lose money policies, but fail to acknowledging that such policies impart financial instability to other countries through the exchange rate mechanism.
The world needs a new international agreement on the lines of Bretton Woods that created the current multilateral financial system, Rajan said in a commentary posted on the website of Project Syndicate.
''What I have in mind will eventually require a new international agreement along the lines of Bretton Woods, and some reinterpretation of the mandates of internationally influential central banks,'' Rajan said.
''If so, what we need are monetary rules that prevent a central bank's domestic mandate from trumping a country's international responsibility,'' he said.
He said that central banks in developed countries find various ways to justify their policies, without acknowledging that the exchange rate may be the primary channel of transmission.
''We can pretend all is well with the global monetary non-system and hope that nothing goes spectacularly wrong. Or we can start building a system fit for the integrated world of the twenty-first century,'' Rajan said.
He said the world is facing an increasingly dangerous situation and both advanced and emerging economies need to grow in order to manage domestic political tensions.
''If governments respond by enacting policies that divert growth from other countries, this 'beggar my neighbour' tactic will simply foster instability elsewhere. What we need, therefore, are new rules of the game,'' he said.
Rajan, who predicted the 2008 markets crash caused by the housing market crisis in the US that put its economy into deep recession setting off a global slowdown, had, in 2011, published the acclaimed ''Fault Lines'' on how hidden financial fractures threaten the world economy.
Predicting the 2008 financial meltdown that is still affecting global economy, Rajan, in 2005, had argued that increasingly complex markets with myriad instruments of credit and mortgage-backed securities in ever greater quantities had made the global financial system a risky place.
Rajan now feels that global markets are at greater risk of a crash due to the competitive loose monetary policies being adopted by developed economies.
Pointing to the very low interest rate policies of the US Federal Reserve, the Bank of Japan and the Bank of England in a bid to stimulate their economies, Rajan has been warning that emerging markets are especially vulnerable to big shifts in capital flows triggered by the unprecedented monetary accommodation in rich countries.