March 12, 2019 / 4:43 PM / 5 months ago

Political pressures risk undermining central banks - Rajan

LONDON, March 12 (Reuters) - Rising political pressures on central banks around the world undermines effective monetary management by risking kneejerk policies rather than pre-emptive decision making, former Reserve Bank of India chief Raghuram Rajan said on Tuesday.

While central bank independence has often been questioned openly in emerging economies such as Turkey or India, popular disgruntlement in richer countries at the weak growth and paltry real wage increases of the past decade have seen central banks increasingly under pressure in developed economies too.

Late last year, for example, U.S. President Donald Trump called the Fed “crazy” for raising interest rates four times and he has repeatedly lambasted the policies decisions of Fed chair Jerome Powell.

“Populism forces the central bank to come out into the open and to explain what it’s doing,” Rajan, also a former chief economist at the International Monetary Fund, told Reuters.

“But by pushing it into the open and into what is normally thought of as the political arena it creates more possibility of direct conflict.”

Greater political scrutiny reasonably puts more onus on central bankers to explain and defend their actions, but it also distorts the time frame they have to consider, he added.

“The politician can talk about here and now and can say ‘there’s no inflation, why are you raising rates, you’re killing the recovery, why don’t you instead cut rates?’,” said Rajan.

“If you’re always constrained to make policy based on the here and now, it’s quite different from making policy based on what you expect things to be.”

While innovative policy thinking has been a feature of the past 10 years, Rajan said he does not think ideas such as the “Modern Monetary Theory” currently championed by some members of the U.S. Democratic Party will ever be put into practice.

“The notion that your ability to issue your own currency and to issue debt in your own currency somehow allows you to escape a budget constraint, is not right,” Rajan - a highly respected Chicago-based economist - told Reuters on the sidelines of promoting his new book in London.

“You can print money the same way as you can issue debt so long as people think you’re good for it. At some point, they stop thinking you’re good for it.”

A reworking of monetary theory by the left of the U.S. Democratic Party ahead of next year’s presidential election, MMT suggests the absence of inflation today should allow governments managing the world’s main reserve currencies to keep interest rates at zero and effectively print money via debt sales to fund future environmental and infrastructure projects.

Asked if he would be interested in taking over from Mark Carney as Bank of England governor, Rajan declined to comment. “I am very happy where I am.” (Reporting by Karin Strohecker and Abhinav Ramnarayan, Additional reporting by Ritvik Carvalho; Editing by Alison Williams)

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