Raghu Rajan’s Reputation and Accomplishments:
Raghu Rajan is a renowned central banker, economic policymaker, and academic with a distinguished reputation. He is known for his cross-border collaboration between academia and the political arena. He is a Professor of Finance at the University of Chicago and a former Governor of the Reserve Bank of India. He received the American Finance Association’s Fisher Black Prize for best finance researcher under 40 in 2003.

Raghu Rajan’s Work at the IMF:
Rajan was Chief Economist and Director of Research at the IMF from 2003 to 2006. He integrated financial sector issues into the IMF’s economic country models, highlighting the importance of considering the financial sector in economic analysis. He emphasized the need for economists to be well-rounded generalists and to develop models that incorporate crucial aspects like the financial sector.

Raghu Rajan’s Insights on Financial Stability:
Rajan warned about the dangers of excessive risk-taking by banks due to implicit promises of central bank support. He argued that monetary policy should explicitly include financial stability as an objective alongside price stability. He highlighted the responsibility of central banks in maintaining financial stability to ensure long-run price stability.

Raghu Rajan’s Impact as Governor of the Reserve Bank of India:
Rajan assumed the role of Governor during a period of crisis in India. He restored investor confidence by shifting monetary policy focus towards price stability. He brought inflation down from over 10% to 4.4% through a glide path towards low inflation, supported by falling energy prices. He asserted the independence and credibility of the Reserve Bank of India, which are key to a stability-oriented monetary policy. He liberalized, developed, and deepened India’s financial sector, enhancing competition and economic growth. He promoted financial inclusion for small and medium-sized enterprises, the unorganized sector, and the poor.

Raghu Rajan’s Recognition and Influence:
Rajan’s efforts led to India’s financial crisis coming to an end, earning him two Central Banker of the Year awards. He is seen as an inspirational force in the central bank community, combining academic, policy, and central banking expertise. Rajan is known for his advocacy for central banks to consider the broader financial system and its impact on long-term price stability.

Laudatio by Otmar Issing:
Otmar Issing praises Raghuram Rajan’s remarkable speech at Jackson Hole, highlighting its insightful nature. Issing mentions that Rajan’s concerns about the financial system were not widely shared, especially among Anglo-Saxon central bankers and economists. He acknowledges the difficulty in keeping up with Rajan’s intellectual speed and the importance of his message.

Deutsche Bank Prize for Financial Economics:
Raghuram Rajan was awarded the Deutsche Bank Prize for Financial Economics in 2013. Issing quotes two sentences from the Laudatio, emphasizing Rajan’s broad range of work in financial economics. Rajan’s work covers areas such as the central role of banks, the role of finance in economic growth, and the nature of corporations and their financing.

Introduction by Raghuram Rajan:
Rajan expresses his gratitude for being invited to speak at the event. He acknowledges President Weidmann, Professor Ising, and the distinguished guests, including the large number of students. Rajan mentions that he had previously given a talk at the Bundesbank a few years ago on the topic of global imbalances.

Global Economic Challenges:
Global organizations like the OECD and IMF have consistently lowered their growth estimates, indicating that seven years after the crisis, the world is still struggling to recover.

Political Pressures:
Despite slow growth, there is tremendous political pressure for more growth in both developed and emerging markets, leading to increased pressure on central banks.

Central Banks’ Dilemma:
Central banks’ mandates prevent them from simply admitting their limitations and acknowledging that they may not be able to fulfill their growth objectives.

Potential Consequences:
Central banks’ attempts to stimulate growth in an environment of limited effectiveness can lead to unintended negative consequences that accumulate over time.

Need for New Rules:
The current situation raises questions about whether new rules of the game are necessary to prevent central banks from creating more problems in the future.

Uncertainties and Alternative Perspectives:
The speaker acknowledges that our understanding of the current economic environment is incomplete and invites consideration of other possibilities and consequences.

Focus on Industrial Country Growth:
The discussion begins by examining the reasons behind the slow growth in industrial countries post-crisis.

Global Economic Growth Post-Crisis:
Uncertain sustainability of pre-crisis growth due to high leverage. Post-crisis deleveraging and debt overhang further slowed growth. Debt write-offs are ideal but challenging to implement.

Fiscal Stimulus:
Post-crisis fiscal stimulus packages were widely implemented. Limited fiscal space and difficulties in efficient spending hindered continued stimulus. Grand infrastructure projects are harder to conceptualize and implement in industrial countries.

Monetary Policy:
Ultra-accommodative monetary policies pursued to chase the low real neutral rate. Savings rates haven’t fallen, and investment rates have dropped despite low interest rates.

Explanations for Lack of Investment:
Structural impediments may be hindering investment and growth. Pre-crisis growth levels may have been unsustainable and fueled by non-inflationary borrowing.

Unanswered Questions:
Why hasn’t investment picked up despite low interest rates? Why haven’t savings fallen with such low interest rates?

Effects of Aging Societies:
Aging populations may lead to decreased investment due to the perception of declining overall demand in the future. The impact of aging on savings and investment is not fully understood.

Income Inequality:
High income inequality can reduce consumption levels as the wealthy have a lower marginal propensity to consume. This could explain slower growth, but it is a slow-moving process and cannot fully explain the recent constraint on growth. Debt may have masked the effects of inequality by providing low-income individuals with more spending power.

Low Productivity:
Low productivity can reduce profitability and investment. The reasons for low productivity are not fully understood.

Stimulus Ineffectiveness:
Quantitative easing and other forms of stimulus may not be sustainable and could reverse when interest rates rise. This could lead to the belief that the stimulus is temporary and not contribute significantly to demand.

Increased Savings:
Aging populations and concerns about the sustainability of government promises may lead to increased savings. Distorted asset prices and wealth shocks may also contribute to increased savings. Very low rates may incentivize increased savings among those reliant on coupon clipping from fixed income assets.

Growth and Inequality:
Low growth is a global issue affecting both industrial and emerging markets, driven by various factors. The slowdown in emerging markets is linked to the decline in industrial country growth. There is an enormous political need for growth to address promises made by governments and to combat rising inequality.

Central Banks and the Pressure to Generate Growth:
Central banks face pressure to stimulate growth due to their mandate to avoid extremely low levels of inflation. Unconventional monetary policies, including those affecting the exchange rate, are employed to achieve growth objectives.

Populism and Simple Solutions:
In this environment, populists emerge, offering simple solutions without considering unintended consequences. Central banks are often targeted by populists who advocate for measures like direct infrastructure financing.

Unconventional Monetary Policy and Financial Stability:
Aggressive monetary policy can have significant consequences for financial stability. Unconventional policies aimed at increasing asset prices may lead to increased spending, even in the absence of a wealth effect. Such policies can have domestic and international ramifications, potentially destabilizing economies.

Exchange Rate Effects:
Unconventional monetary policies can lead to a depreciation of the exchange rate, potentially boosting the economy. However, the exchange rate benefits may be limited if other countries also pursue similar policies.

Growth Effects:
Unconventional monetary policies have not shown significant effects on real investment and growth.

Financial Risk-Taking:
Unconventional monetary policies can increase financial risk-taking, making it harder to exit these policies.

Prisoner’s Dilemma Situation:
Countries face a prisoner’s dilemma, where staying in unconventional monetary policies has limited benefits but big costs of exiting. This leads to prolonged periods of unconventional monetary policies, increasing the risk of credit and real estate booms, capital outflows, and financial crises.

Musical Crisis:
The last 20 years have been characterized by a “musical crisis,” where capital flows have shifted from industrial countries to emerging markets and back. This has resulted in crises in both industrial countries and emerging markets.

Global Savings Glut:
Emerging markets have shifted from being capital importers to capital exporters, leading to a global savings glut. This has contributed to low interest rates and easy monetary policies in industrial countries.

Cross-Border Capital Flows:
Cross-border capital flows, driven by easy monetary policies, have been a major factor in the financial crises of 2007-8 and beyond.

Global Financial Crisis: A Series of Interconnected Crises:
Raghuram Rajan views the current emerging markets crisis as the third leg of the global financial crisis, preceded by other crises since the early 1990s. He emphasizes the interconnectedness of these crises and the challenges in finding sustainable growth solutions.

Shifting Focus to Real Investments and Infrastructure:
Rajan proposes a shift away from unconventional monetary policy towards promoting real investments, particularly in infrastructure development in emerging markets and green investments in industrial countries. He highlights the need for increased domestic investment and patience in allowing these investments to generate long-term benefits.

Costs of Unconventional Monetary Policy:
Rajan warns of the unintended consequences of prolonged unconventional monetary policy, including deepening distortions, diminishing benefits, and increasing political economy effects. He emphasizes the need for central banks to recognize the costs of such policies and consider alternatives for promoting growth.

Importance of International Cooperation and Rules:
Rajan suggests exploring international agreements on legitimate and less legitimate monetary policies to limit the burden placed on individual central banks. He proposes examining policies with sustained negative spillover effects more closely and considering mechanisms for countries to repay the help they receive through unconventional monetary policies.

Collective Action to Address Prisoner’s Dilemma:
Rajan acknowledges the prisoner’s dilemma situation where central banks fear exiting ultra-accommodative policies due to exchange rate effects. He proposes collective action, not coordinated, but with a shared understanding, to move away from ultra-accommodative policies collectively, thereby mitigating the negative consequences.

The Need for Global Collective Action to Achieve Growth:
Raghuram Rajan emphasizes the importance of coordinated global action to promote economic growth and avoid policies that take growth from each other.

Global Prisoner’s Dilemma and the Trap of Low Interest Rates:
Rajan discusses the prisoner’s dilemma faced by central banks, where each bank’s pursuit of low interest rates and unconventional measures can lead to a collective trap of low growth and suboptimal outcomes.

Leadership and the Challenge of Implementation:
The need for leadership to break out of the current dilemma is acknowledged, but the political difficulties of implementing such policies are recognized.

Growth vs. Distribution Dilemma:
Rajan acknowledges the two potential solutions to the current economic challenges: stimulating growth and addressing the distribution problem. He expresses skepticism about the viability of directly tackling the distribution problem due to distrust in politics and the complexity of the issue.

People’s Quantitative Easing:
A question is raised about the potential of “people’s quantitative easing” as a means to combine growth stimulation with addressing inequality. Rajan admits that he has not fully explored this idea and acknowledges the need for further consideration.

Keynesian Insights and the Focus on the Money Motive:
Rajan mentions Keynes’ essay “Economic Prospects for Our Grandchildren” and highlights Keynes’ opposition to the money motive as a primary driver of economic behavior.

Incentives and Innovation:
Raghuram Rajan argues that even in a utopian society with abundant resources, growth and incentives are necessary to address problems and promote innovation. Taxing the wealthy excessively can discourage entrepreneurship and innovation, potentially leading to a decline in economic dynamism.

Societal Values and Wealth Distribution:
Rajan suggests that societal values can change over time, influencing the perception and importance of wealth. He posits that shifting societal values towards deemphasizing wealth accumulation could facilitate more equitable distribution.

QE and Fiscal Discipline:
Rajan views quantitative easing (QE) as a form of fiscal deficit financing, which can have significant implications for inflation and overall economic stability. He emphasizes the importance of responsible fiscal discipline and cautions against abandoning fiscal discipline in favor of excessive QE.

Global Economy and Fed Exit:
Rajan expresses concern about the global economy’s ability to withstand a reduction in loose monetary policy from the US Federal Reserve. He highlights the potential consequences of the Fed’s tapering of asset purchases, known as the “taper tantrum,” which could lead to market volatility and economic uncertainty.

Investment in Education and Training:
Rajan acknowledges the importance of investing in education and training to address issues such as inequality and low productivity. He suggests that such investments can contribute to a more equitable and productive economy, although he does not delve into this topic in detail during the discussion.

Education and Employment:
Excessive emphasis on higher education in the United States has led to high levels of student debt and a lack of job-relevant skills. Expanding skills and education is necessary, but it cannot be the sole solution for all individuals. Reevaluating how individuals can participate in the economy after their jobs become obsolete is crucial.

Global Preparedness for Liftoff:
The end of ultra-accommodative monetary policies has been widely anticipated, but not all countries are equally prepared. Raghuram Rajan is more concerned about the consequences of staying in an ultra-accommodative phase than about the temporary volatility that may result from exiting it. Volatility is inevitable during the transition, but it is preferable to the deeper volatility that could occur if the transition is delayed.

Political Obstacles and Central Bank Responsibility:
Raghuram Rajan agrees that political obstacles exist for necessary changes. Politicians have shifted some of the responsibility for addressing economic challenges to central banks.

Central Bankers and the Structural Problem of Democracy:
Raghuram Rajan highlights a structural problem in democracy where central banks are mandated to maintain inflation above a certain level, leading to moral hazard and reluctance to address underlying economic issues.

Rethinking Global Economic Governance:
Rajan suggests the need for a set of rules or principles that define global citizenship for economic policies, ensuring that policies align with long-term global well-being.

Impact of Ultra-Low Monetary Policy on the Financial Sector:
Rajan acknowledges the potential negative impact of ultra-low monetary policy on the profitability of the financial sector, but emphasizes that central banks’ focus should be on maintaining financial stability.

The Role of Monetary Aggregates in Monetary Policy:
Rajan acknowledges that the Reserve Bank of India considers monetary aggregates, such as the central bank’s balance sheet expansion, in its monetary policy decision-making.

India’s Economic Growth and Development:
Rajan discusses India’s progress in achieving macro stability and highlights the importance of infrastructure build-out, human capital development, business regulation reforms, and financial sector reforms for sustainable growth. He emphasizes the potential of internet marketplaces and mobile technology in expanding opportunities for small entrepreneurs and consumers.

Raghuram Rajan’s Concluding Remarks:
Rajan emphasized the need for implementation and action to ensure that promises made by central banks are fulfilled. He acknowledged Issing’s hesitation to ask for coordination, recognizing the challenges associated with it.

Otmar Issing’s Concerns:
Issing raised the issue of finding the appropriate terminology to describe the desired approach, as the term “coordination” has limitations. He highlighted the importance of agreeing on a diagnosis before agreeing on policy measures, particularly regarding the assessment of low interest rates and unconventional monetary policies. Issing expressed concern about the negative side effects of unconventional policies, including the buildup of risks and the potential for a future crash in asset prices. He emphasized the need for a common assessment among central banks worldwide to provide a basis for a common approach.

Raghuram Rajan’s Response:
Rajan acknowledged that the positive effects of unconventional policies may have been limited to the early stages and have dissipated over time. He acknowledged the intent of such policies to alter asset prices, recognizing that shifts in asset prices are likely when these policies are unwound. Rajan expressed concern that prolonging these policies could exacerbate problems and leave central banks with fewer tools in the future. He highlighted the importance of taking necessary actions now rather than postponing them until a later crisis.

Otmar Issing’s Gratitude and Invitation:
Issing thanked Rajan for his speech and answers during the event. He expressed gratitude for Rajan’s willingness to continue sharing his insights in the future. Issing extended an invitation for Rajan to speak again at future events, expressing the privilege of having him present.