New Delhi: Viral P Acharya, who joins the Reserve Bank of India as a Deputy Governor, has strongly argued for central banks being “democratically accountable yet be operationally independent from political influence.”
The CV Starr Professor of Economics at the Stern School in New York University has also coauthored a paper with Raghuram Rajan, his colleague in US academia and former RBI governor.
“Raghu has been a great source of inspiration for me… I see many shades of things we see in the Indian economy permeating in Raghu’s work,” Acharya, who once co-authored a paper with Rajan, had said in a Deutsche Bank Prize plenary lecture in 2013.
Acharya joins RBI when it has come under a barrage of criticism for the 50-odd adhoc rules and regulations it has come up with to cope with the demonetization drive of November 8.
Incidentally, one of the criticism that has come the way of RBI is that it is losing its institutional independence.
Acharya, in a paper titled ‘Financial stability in the broader mandate for central banks: A political economy perspective’, argues that central banks should be able to manage financial crises without being subject to the short-term whims of politics.
The paper prepared for a 2015 conference at Brookings’ Hutchins Center on Fiscal and Monetary Policy studies in depth the relationship between the Federal Reserve (the US central bank) and the US Congress.
Acharya believes that the Fed should consider using interest rates as a tool to promote financial stability. He thinks that Congress should give the Fed an explicit financial stability mandate. In a booming economy, Fed regulations limiting financial excesses could be politically unpopular, he says.
Acharya argues that Congress should let the Fed regulate growth and leverage in shadow banks, institutions normally beyond the Fed’s jurisdiction. Otherwise, financial institutions could escape regulation by simply calling themselves something other than banks. To avoid this “regulatory arbitrage,” Acharya suggests regulating “by function rather than form.”
Acharya argues that regulators other than the Fed should also play a role in crisis management and prevention. Such power sharing would make it difficult for politicians and regulated institutions to “influence the entire regulatory apparatus” by influencing “just one regulatory agency.”