Monetary policies have proved to be damp squibs, says IMF Executive Director

• Says central banks have relied on flawed concept of monetary multiplier
• Points out post great financial crisis, central banks have failed to stimulate growth 

The monetary policies have proved to be damp squibs, as the approach by the central banks across the world in setting the framework post great financial crisis has failed dismally in stimulating growth, said International Monetary Fund (IMF) Executive Director for India Dr. K.V. Subaramanian.  

Calling the monetary policies ‘bazookas’, Dr. Subaramanian, who also served as India’s former Chief Economic Advisor, asserted that the framework followed by the central banks across economies has relied on the flawed concept of the monetary multiplier – therefore, has failed to deliver the expected results in terms of creating economic growth and prosperity. 

“As both conventional and non-conventional monetary policies that are based on the money multiplier concept or the concept that releasing bank reserves will lead to lending, neither of those work. They have proved to be ineffective. 

There has been no effect on growth, largely since broad money did not increase and bank lending remained unaffected,” said Dr. Subaramanian while delivering a lecture at the Central Bank of Sri Lanka on Thursday. 
The visiting official spoke on the topic ‘Monetary Policy in a Changing World’, which was based on the book titled ‘Money: A Zero Sum Game’, which is co-authored with Krishnamurthy Vaidyanathan. 

He noted that the role of the central banks, as the regulator of banks and supervisor of banks, is far more important than its role in setting the monetary policy framework and changing reserve ratios. 

According to the economist, the money multiplier doesn’t work in the real world. It has not worked for the Organisation for Economic Co-operation and Development member economies either. 

Further, pointing out that increasing bank reserves does not enhance bank lending, as is shown based on evidence from the US and India, he stated that deposits do not cause loans, as predicted by the theory of financial intermediation.