Harvard Professor Kenneth Rogoff said that the US Federal Reserve should have started to wind down its quantitative easing (QE) programme much more aggressively than by resorting to the current piecemeal approach.

The US Fed has been buying bonds worth $85 billion every month for over the past one year to pump money into the markets (to support growth, reduce unemployment, and so on).

Rogoff spoke about QE and its impact on emerging market economies such as India in a lecture organised by the RBI in memory of its 8th Governor, Lakshmi Kant Jha.

He said the US Fed must have raised the inflation trajectory before it embarked on the QE tapering programme.

“I think the central bank (US Fed) is telling the markets that we are going to go slow on QE and telling them that we will keep the interest rates down for long. Now the problem with this promise is that it does not have the instrument to deliver it (low inflation) somehow,” Rogoff said.

QE, he said, is a very experimental policy. That is because policymakers never really know what they will deliver through QE.

On the blackboard

“QE has been on the blackboard. I have been teaching it for more than 15 years and it works very well on the blackboard. But it is not clear what happens when you implement it, because there is a lot of uncertainty,” said the professor, who was also the former chief economist at the International Monetary Fund.

The announcement that the US Fed will withdraw QE sent global markets into a tailspin and sent the rupee plummeting to a life-low of 68.80 in August.

Rogoff also said that this has meant that emerging markets have to face multiplied uncertainty.

“You (India) are worrying about the taper in the future and you were worrying about the Euro-Zone. This period of uncertainty and slow growth is just a fact of life that you have to adjust to,” he said.

On the other hand, Rogoff said that India should feel perfectly free to give opinions on what should be done when these policies have an impact on the country.

“Advanced economies were not ready to listen to leaders from emerging economies when the crises began because they were pretending at that point that it was not a financial crises,” he said.

Structural reforms

He said that India needs continued structural reforms to rekindle growth.

“There are things that India has done very well. I couldn’t believe when I flew into the airport and when I went over the sea-link bridge…I think if India could deliver more infra projects like that then it will be very useful,” he said adding that the government should spend on infrastructure that eventually would pay for itself.

satyanarayan.iyer@thehindu.co.in

(This article was published on December 17, 2013)
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