By Mohamed El-Erian

Raghuram Rajan, a highly respected University of Chicago economist who now heads the Reserve Bank of India, is bringing much-needed attention to a crucial issue for the global economy: the spillover effects that the unconventional monetary policies of big Western central banks, particularly the U.S. Federal Reserve, have on other countries all over the world.

His views started attracting a lot more interest a few weeks ago when he had a rather unusual public back-and-forth with another highly respected economist, former Fed Chairman Ben S. Bernanke, at the Brookings Institution in Washington. Rajan's point, elaborated in a later column for Project Syndicate, is that if the spillover effects of the West's experimental monetary policies are better understood, it might turn out that their benefits don’t exceed their costs and risks.

Rajan has no quarrel with the policies themselves as part of central banks’ arsenal, particularly as a way to stabilize financial markets in times of crisis. His concern is that when they become the main way to stimulate economies suffering from debt overhangs and structural problems like those currently afflicting the U.S., the resulting liquidity injection can't all be efficiently absorbed at home. Instead, it is pushed abroad.

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Reflecting the overly ambitious expectations that Western central banks have placed on the effectiveness of such unconventional measures, the domestic economic growth response has repeatedly fallen short of their forecasts. In the meantime, other parts of the world have had to deal with disruptions that impair their economic performance, resulting in lower global growth and risking a range of adverse feedback loops. Note, for example, how stocks, bonds and currencies across emerging markets suffered in May and June of last year (and earlier this year, albeit to a lesser extent) as investors fretted about the Fed's plans to taper monthly bond purchases aimed at supporting the U.S. recovery.

As Rajan put it, the West’s unconventional policies can “fuel currency and asset-price volatility in both the home economy and emerging countries,” rather than deliver the intended sizable net benefits. As such, “greater coordination among central banks would contribute substantially to ensuring that monetary policy does its job at home, without excessive adverse side effects elsewhere.”

Bernanke, for his part, has countered such arguments by encouraging a deeper appreciation of the beneficial economic growth impact of the bond-buying program known as quantitative easing. The higher the growth rate in the West, the better it is for international trade, financial stability and, therefore, the outlook for the rest of the world.

Along with other Western officials, Bernanke has also argued that central banks' mandates limit their policy goals to domestic variables and domestic objectives. So, to the extent that there are negative externalities, it is the responsibility of the rest of the world to deal with them. Whenever the spillover issues have come up in multilateral policy discussions, such as the Group of 20 meeting in February 2013, Western officials have prevailed on the grounds that their central banks are rightly focused on their own economies.

Rajan’s insights and policy recommendations are not totally new, and he is not the first developing country official to speak out. Still, he is the first person to openly take up the issue on the basis of an impressive trio of relevant central bank experience in a systemically important developing country, a remarkable academic pedigree and a successful tenure as the economic counselor of the International Monetary Fund. As such, it should be much harder for Western policy makers, and for their representatives at multilateral institutions, to dismiss his arguments.

There is reason to hope that, this time around, an important national and global policy issue may finally command more serious attention from national policy makers, academic researchers and multilateral institutions. It certainly deserves it.

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