Monetary Policy and Its Unintended Consequences

by Raghuram G. Rajan

A call for an end to aggressive monetary policy and a return to smart growth from an eminent researcher and former central banker.

Central banks took extraordinary measures to stabilize markets and enhance growth after the financial crisis of 2008, but without giving much thought to the long-term consequences. It was a response, Raghuram Rajan argues, that set a dangerous the more centrals bank did, the more they were expected to do, and the more they ended up doing. Monetary Policy and Its Unintended Consequences looks back at what this meant for where we are now.

A former central banker who foresaw the 2008 crisis and wrote a bestselling book about the risks of excessively accommodative monetary policy, Rajan takes a hard look at central bank behavior and its embrace of increasingly aggressive strategies to keep economies afloat. Despite efforts to strengthen markets, the 2020 pandemic showed economies remain as vulnerable as ever to adverse shocks, prompting large-scale interventions that, in the case of Covid, led to persistent inflation and market volatility. By examining these undertheorized outcomes, Rajan hopes central banks will recognize the unintended consequences of using all of the instruments available to them, which will encourage them to return to their core mandates of low inflation and financial stability.

Monetary Policy and Its Unintended Consequences is the most thorough account yet of the choices central banks have made to meet the economic challenges of our century and why they must rethink these choices.

Genres: Economics, Nonfiction

134 pages, Kindle Edition

Published November 14, 2023

About the author

Raghuram Govind Rajan is a world-class Indian economist who has also served as the twenty-third Governor of the Reserve Bank of India. He also serves as Eric J. Gleacher Distinguished Service Professor of Finance at the Booth School of Business at the University of Chicago. Rajan is also a visiting professor for the World Bank, Federal Reserve Board, and Swedish Parliamentary Commission. He formerly served as the president of the American Finance Association and was the chief economist of the International Monetary Fund (IMF).

In 1985, he graduated from the IIT, Delhi with a bachelor's degree in electrical engineering, and he completed his MBA at the IIM, Ahmedabad in 1987. He received a PhD in management from the Massachusetts Institute of Technology (MIT) in 1991 for his thesis titled "Essays on Banking".

Reviews

[Isaac Chan · Rating 4 out of 5]

1 term to summarize this book's central thesis: negative externalities. Domestic economic issues are a central bank's private Euler equation, but they neglect the spillovers i.e., social cost their monetary policy will invoke on other countries. An ideal economic agent should consider the total social cost of his decisions, not just personal.

For all his brilliance, Rajan is quick to criticize but slow to offer any satisfying solutions. I'm convinced of his argument of the negative spillover effects of monetary policy, but central banking is already an insanely tough job! Let alone having to consider extra social welfare? It's already a tricky, smoke-and-mirrors business to nowcast your own economy, let alone other economies where you're subjected to asymmetric information and the agency problem - emerging economies have an incentive to over-report their financial problems so the source economy will accommodate them. There's also a hint of projection in Rajan's rants - presumably, as a central banker of India, he's exposed to the negative spillovers of DM central banks.

Learned a few useful new things from this short book. Very nice.

[Myanmar Scholar · Rating 5 out of 5]

Unlike his other books, some chapters in this book contain many technical terms. As a result, some readers, who are not familiar with latest economic jargons and theories, would find it difficult to read. I would like to point out that some recommendations he provides in this book are useful and should be implemented. The author points out that some policy tools that the central bankers in developed countries adopt such as lowering interest rate to increase exports could have significant as well as unintended consequences on developing countries. For example, if the Federal Reserved in the US lowers interest rate in order to raise US exports to the world could cause capital inflows to developing countries. Consequently, the volume of exports from developing countries could decrease due to their overvalued currencies. As a result, coordination between cental bankers in both developed and developing countries is essential to maintain global financial stability. Overall, it is a good book that provides valuable advice to policymakers.