October 03, 2016

Capital Flows and the Raghuram Rajan Hypothesis

Vivek Dehejia, Resident Senior Fellow at IDFC Institute, examines academic responses to the Rajan hypothesis.


"In a nutshell, Rajan’s argument is that excessive monetary loosening in advanced economies via UMPs functions as a contemporary form of “beggar thy neighbour” competitive devaluation, inducing capital in search of yields to flow into emerging economies and thereby causing an appreciation of their exchange rates. This, in turn, and other things being equal, reduces their competitiveness vis-a-vis advanced economies. While he believes that Rajan's criticism of the current non-system is valid, it will be to no avail in the absence of a better alternative."


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