on global welfare, it would definitely be rated green. conventional monetary policy would typically fall in this category, as it would raise output in the home economy, and create demand for exports from the foreign economy. a green rating for such policies would, however, assume that the stage of the financial and credit cycle in the home and foreign economies is such that financial stability risks from low interest rates are likely to be limited. a policy could also be rated green if it acts as a booster shot and can jump - start a large home economy, but creates temporary negative spillovers for the foreign economy. even if there are temporary adverse spillovers on foreign countries, the policy, through its effect on home economy growth and demand for foreign goods, can eventually provide offsetting large positive spillovers to the rest of the world. of course, it is important that the home economy, after receiving the booster shot and picking up growth, not follow policies ( such as holding down its exchange rate ) that minimize positive spillovers to other countries. a policy rated red on a static basis could thus be deemed green based on implicit commitments over time. it is possible to visualize other policies that have large positive effects for the originating country ( because of the value of the policy or because of the country ’ s relative size ) and sustained small negative effects for the rest of the world. global welfare, crudely speaking, may go up with the policy, even though welfare outside the originating country goes down. while it is hard to rate such policies without going into specifics, these may correctly belong in the orange category – permissible for some time but not on a sustained basis. even conventional monetary policies to raise growth in the home economy could fall in the orange category if countries are at a stage of financial cycle where low interest rates lead to significant financial stability risks in the home and foreign economies. clearly, foreign countries may have policy room to respond, and that should be taken into account. perhaps the right way to measure spillovers to the foreign country is to measure their welfare without the policy under question ` and their welfare after the policy is implemented and response initiated. so, for instance, a home country a at the zero lower bound may initiate quantitative easing ( qe ), and a foreign country b may respond by cutting interest rates to avoid capital inflows and exchange rate appreciation. the spillover effects of qe would be based on b ’ s welfare if qe was not undertaken versus b ’ s welfare after q

, for example, it is required to adopt all possible policies to get inflation back on target, no matter what their external effect. indeed, it can even intervene directly in the exchange rate in a sustained and unidirectional way, though internationally this could be seen as an abdication of international responsibility according to the old standards. in the current state of affairs, industrial country central banks find all sorts of ways to justify their policies in international fora, without acknowledging the unmentionable – that the exchange rate may be the primary channel of transmission, and that adverse capital flow spillovers may be sizeable. of course, central banks consider “ spillbacks ” to their policies from abroad, but these may be a small fraction of overall spillovers. in what follows, i will examine sensible rules of monetary behavior assuming the domestic mandate does not trump international responsibility. rules of the game what would be the basis for the new rules? as described elsewhere, the state of theoretical models and empirical work do not allow for clear cut identification of spillovers and their consequences. 2 rather than wait for clear identification, which may be a long while coming, perhaps as a start policies could be broadly rated based on analytical inputs and discussion. to use a driving analogy, polices that are generally seen to have few adverse spillovers, and are even to be encouraged by the global community should be rated green, policies that see prachi mishra and raghuram rajan, “ rules of the monetary game ”, 2016, mimeo. bis central bankers ’ speeches should be used temporarily and with care could be rated orange, and policies that should be avoided at all times could be rated red. to establish such ratings, the effects of any policy have to be seen over time, rather than at a point in time. in general, policies that are likely to have net adverse outside spillovers over time could be rated red and should be avoided. such policies obviously include those that have small positive effects in the home country ( where the policy action originates ) combined with large negative effects in the foreign country ( where the spillovers occur ). for example, if unconventional monetary policy actions lead to small positive effects on exports to emerging economies ( ems ) and a feeble recovery in the source country but large capital outflows and asset price bubbles in the ems, these policies could be rated red. global welfare would decrease with this policy. if a policy has positive effects on both home and foreign countries, and therefore