Central banks should not mandate ‘green’ investments: Raghuram Rajan

Central banks should steer clear of politically-driven unlegislated areas such as “green” investments, as their mandates of providing financial and monetary stability are already quite wide, Rajan told the Reuters Global Markets Forum on Wednesday. 

“Asking the central bank to say you should buy only green bonds, not brown bonds, etc., is asking the central bank to impose its own views on something which is primarily a fiscal matter,” he said. 

Rajan, who earlier served as chief economist for the International Monetary Fund, said central banks should instead turn their focus to the financial stability of these green investments and other threats such as crypto currencies and cyber security. 

Crypto currencies have a “potential future,” particularly well-regulated stablecoins, Rajan said, but it wasn’t clear what fundamentals were backing their valuations other than a “heady environment,” with easy monetary policy fuelling all asset prices. 

Cryptos won’t be “your last resort” in a doomsday scenario, he said. “I would be much more confident about the value of these cryptos once they find proper use cases,” such as an effective means of payment, especially in cross-border transactions. 

Rajan, professor of finance at the University of Chicago Booth School of Business, did not expect markets to react in a 2013-style “taper tantrum” as the US Federal Reserve unveils its plan to withdraw stimulus, which he said was unlikely to happen at Jackson Hole on Friday. “Ideally, the Fed would like to observe as long as possible, (and) ... make sure that the economy is well on track towards growth, he said. “Of course, the problem is the Delta variant, plus whatever variants are lurking in the background.” 

He expected inflationary pressures in the United States to be transitory, but said prices may remain elevated for longer than expected due to strong wages, unavailability of workers, and additional fiscal stimulus measures. “Firms are feeling confident enough to pass through price increase ... they don’t do that until they think that these higher prices are to stay,” Rajan said.