Central banks across the world have pumped in excess liquidity to help the global economy tide over the coronavirus pandemic. While the U.S. Federal Reserve has assured that it will not withdraw this support anytime soon, a rollback whenever it happens, according to Raghuram Rajan, may lead to ‘taper tantrum'.
“The worry is that markets are leveraging on that promise and when that time comes to switch, unless it is really steadily advertised and markets have time to react, a taper tantrum moment is possible,” the former Reserve Bank of India governor told Bloomberg in an interview.
Emerging markets had witnessed ‘taper tantrum' in 2013 when the Federal Reserve's announcement of slowly putting breaks in its quantitative easing programme led to a collective panic and a surge in U.S. treasury yields.
Many central bankers have said “we should stop the market from taking such positions but there aren't any tools available to do that”, Rajan said. A pullback in liquidity is unlikely to happen this year, he said, but it will happen at some point.
On the positive side, the pandemic has led to better adaptation of technology, opening up opportunities for emerging market to provide long-distance services to the rest of the world, Rajan said.
Need To Address Inequality
One of the main concerns for the economist is that of inequality — not just within countries, but also between them.
A number of countries do not have the firepower to provide the kind of stimulus developing countries have. Hence, they have not been able to fight coronavirus or repair the damage caused by it, Rajan said. Even as the global economy rebounds, some countries will be left behind even further than they were before, he said.
“We need a strong global move to deal with inequalities between countries, the problem of development and to ensure those countries facing high debt that have not been able to tackle the virus effectively, do have a chance as we go forward,” Rajan said. “That will also be important for global demand.”
Watch the full conversation here:
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