duvvuri subbarao : policy discipline and spillovers in an inter - connected global economy comments by dr duvvuri subbarao, governor of the reserve bank of india, at the highlevel conference on the international monetary system, zurich, 10 may 2011. * * * 1. the interconnected world is not new. we have been living in it for some time. for half a century, exports, international capital flows, and foreign direct investment have been growing much faster than gdp, binding economies ever more tightly together. in many ways, this process has been a tremendous force for good. my own country, india, is testament to that. integration with the world contributed to growth, lifting hundreds of millions of people out of poverty. but in the past few years, we have seen that these linkages can also have tremendous costs : developments in other countries, over which we have no control, can without warning plunge countries into difficulty or even crisis. 2. so, we need to find ways to maximize the benefits of globalization while minimizing its costs. to do this, there are two basic imperatives. first, we need to better understand the ways in which we are linked together. and then, we need to translate this understanding into coordinated policy action. that is, we need to consider ways in which countries can impose policy discipline on one another ’ s behaviour, to minimize the risks that their policies could pose for others. i would like to focus my brief remarks today on these two tasks : understanding the nature of linkages and doing something about them. understanding linkages 3. we cannot begin to impose policy discipline on countries until we improve our understanding of the linkages amongst economies. recent experience shows that our understanding of the nature of these linkages is seriously deficient. in fact, standard econometric models still suggest that shocks in one country have very small effects on other countries. they do that because they assume that trade is the primary channel for transmitting these shocks across countries, and trade moves in line with gdp. both these assumption are flawed. as we all know, the 2008 crisis originated in the housing sector which is a quintessentially non - traded good. 4. in addition, we saw during the crisis that the financial channel is tremendously important, in ways that are still poorly understood. for example, after lehman collapsed, interbank rates in india soared, by much more than in many other emerging markets, even though india ’

duvvuri subbarao : impact of the global financial crisis on india – collateral damage and response speech by dr duvvuri subbarao, governor of the reserve bank of india, at the symposium on “ the global economic crisis and challenges for the asian economy in a changing world ” organized by the institute for international monetary affairs, tokyo, 18 february 2009. * * * global outlook the global economic outlook deteriorated sharply over the last quarter. in a sign of the ferocity of the down turn, the imf made a marked downward revision of its estimate for global growth in 2009 in purchasing power parity terms – from its forecast of 3. 0 per cent made in october 2008 to 0. 5 per cent in january 2009. in market exchange rate terms, the downturn is sharper – global gdp is projected to actually shrink by 0. 6 per cent. with all the advanced economies – the united states, europe and japan – having firmly gone into recession, the contagion of the crisis from the financial sector to the real sector has been unforgiving and total. recent evidence suggests that contractionary forces are strong : demand has slumped, production is plunging, job losses are rising and credit markets remain in seizure. most worryingly, world trade – the main channel through which the downturn will get transmitted on the way forward – is projected to contract by 2. 8 per cent in 2009. policy making around the world is in clearly uncharted territory. governments and central banks across countries have responded to the crisis through big, aggressive and unconventional measures. there is a contentious debate on whether these measures are adequate and appropriate, and when, if at all, they will start to show results. there has also been a separate debate on how abandoning the rule book driven by the tyranny of the shortterm, is compromising medium - term sustainability. what is clearly beyond debate though is that this great recession of 2008 / 09 is going to be deeper and the recovery longer than earlier thought. emerging economies contrary to the “ decoupling theory ”, emerging economies too have been hit by the crisis. the decoupling theory, which was intellectually fashionable even as late as a year ago, held that even if advanced economies went into a downturn, emerging economies will remain unscathed because of their substantial foreign exchange reserves, improved policy framework, robust corporate balance sheets and relatively healthy banking sector. in a rapidly globalizing world, the ” decoupling theory