WASHINGTON: Cross-border capital flows have been a source of financial fragility, former RBI governor Raghuram Rajan has said as he underscored that countries should see how best they can benefit from cross-border flows, without incurring the costs.
In his 'Mundell-Fleming Lecture' at the International Monetary Fund headquarters, Rajan argued that even if countries at either end of the flows follow reasonable policies, the nature of the expansion in liquidity in the up-cycle may, by increasing leverage and reducing pledgeability, set the stage for a costly downturn.
“Cross-border capital flows, whether pushed by sending countries or pulled by receiving countries, have been a source of financial fragility,” Rajan, who now is the Katherine Dusak Miller Distinguished Service Professor of Finance, at University of Chicago's Booth School of Business, said on Thursday.
"In a world where nationalism is on the rise, such spillovers create an environment that is prone to misunderstanding and potential conflict," he said in his lecture held during the 19th Jacques Polak Annual Research Conference on 'International Spillovers and Cooperation', of the IMF.
"Sending countries may see reserve build-up in receiving countries as unfair exchange rate manipulation, while receiving countries may feel indignant that they have to assume full responsibility for managing the collateral effects of industrial country monetary policies," Rajan said.