If global policy makers – particularly those in the U.S. – are to fully "open the spigots" in terms of fiscal spending and by extending accommodative monetary policy it could create bubbles in some asset markets, Stephen Roach, Yale professor and former chairman of Morgan Stanley Asia, told CNBC on Friday.
Some political leaders and economists, such as American economist Paul Krugman, have called on U.S. and European governments to implement hefty fiscal spending to stimulate growth and counter the tough austerity measures rolled out in recent years, but Roach warned that continuing down that path could be dangerous.
"The risk is if they make a policy mistake…then maybe it doesn't show up in consumer price index (CPI) inflation but maybe it shows up in asset inflation. We could have more bubbles in junk bond yields or in some more exotic fixed income instruments that could be inherently destabilizing to market dependent asset economies," said Roach.
"The wise and judicious policy maker needs to figure out that just because inflation is low does that give them free reign to open the spigots?" he added.
Roach noted that consumer price indices (CPI), a measure of inflation widely used by government which monitors the price changes of a basket of consumer goods and services bought by a typical household, may not be the best gauge of price pressures.
"We need to be much broader and more holistic in assessing the types of inflation we are benchmarking our policies to. And to look at the narrow CPI and draw the conclusion that just because it's low we can do whatever we want I think is risky," he added.