Central banks around the world need to coordinate on monetary policy in order to combat shared challenges but they also need to act to prevent "monetary policy spillovers," European Central Bank (ECB) President Mario Draghi said on Tuesday.
"The international dimension of monetary policy is becoming more pertinent, since the common factors affecting central banks are increasing," Draghi said.
Draghi told an ECB forum in Sintra, Portugal that although central banks faced common challenges such as low inflation, policies needed to be in place to counteract "destabilizing" monetary policy "spillovers."
"Operating against persistent headwinds arising from abroad has forced central banks to deploy monetary policy with more intensity to deliver their mandates, and that in turn results in higher financial stability risks and spillovers to economic and financial conditions in other jurisdictions," he said.
"Monetary policy has inevitably created destabilizing spillovers as well, especially when business cycles have been less aligned. The large exchange rate fluctuations between major currencies, and the pressures some emerging economies have experienced from capital flows, are testament to that," he said.
"This is not so much a result of the measures central banks have employed, but rather of the intensity with which they have had to be used," he added.
In order to counteract low inflation and growth in the euro zone, the ECB embarked on a massive quantitative easing program, boosting its arsenal of weapons earlier this year by cutting interest rates further and adding corporate bonds to its bond-buying program.
At the same time, central banks in the U.S., U.K. and Japan have similarly tried to boost lending, corporate spending and investment. The U.S. Federal Reserve has initiated rate rises recently, however, a move that might have been premature given continuing concerns over U.S. and global growth.
Speaking to the forum in Sintra, Draghi said that central banks could coordinate policies.
"We may not need formal coordination of policies. But we can benefit from alignment of policies. What I mean by alignment is a shared diagnosis of the root causes of the challenges that affect us all; and a shared commitment to found our domestic policies on that diagnosis," he said.
The upshot is that, in a globalized world, the global policy mix matters, Draghi added, "and will likely matter more as our economies become more integrated. So we have to think not just about whether our domestic monetary policies are appropriate, but whether they are properly aligned across jurisdictions."
"We have to think not just about the composition of policies within our jurisdictions, but about the global composition that can maximize the effects of monetary policy so that our respective mandates can best be delivered without overburdening further monetary policy, and so as to limit any destabilizing spillovers. This is not a preference or a choice. It is simply the new reality we face."