Monetary Policy, Sovereign Debt and Financial Stability: The New Trilemma edited by Deepak Mohanty (New Delhi: Reserve Bank of India, Foundation Books, Cambridge University Press India), 2014, pp xiv + 370, Rs 995.
Inflation targeting as currently conducted by central banks in both developed and developing economies is breaking down. In the developed countries it is stymied by asset and credit bubbles and in developing countries infl ation targeting has been disrupted by the source of infl ationary pressures and volatile capital fl ows. Developing countries need to fi nd ways of targeting non-core infl ation, and also need to devise a separate policy instrument to target the external fi nancial cycle.
The recent global debate on monetary policy has centred on whether policy should target financial stability in addition to the domestic business cycle. With relatively tightly regulated fi nancial markets, where concerns presently are more developmental than regulatory, the counterpart debate in emerging market economies centres on reconciling two widely held economic policy formulations, namely, the Mundell-Fleming "Impossible Trinity" and the "Taylor Rule". This article argues that EMEs can get around the trilemma by adopting a separate0 instrument as part of a consistent policy framework to target the external financial cycle. This would free up their interest rate policies to target the domestic business cycle, without the need to deviate from the Taylor Rule from time to time to target external fi nancial stability.
Tracing the rise of Keynesian policies in the post-second world war years to its decline in the 1970s and 1980s with monetary policy playing a central role in macroeconomic stabilisation, this article examines its resurrection in the years following the global financial and economic crisis of 2007-08. It points out that at the heart of the present stimulus-austerity debate is the effectiveness of Keynesian stimulus policies during episodes of growth falling below potential, and classifi es growth crises into three different types for analytical clarity. Analysis shows that though the growth crisis in advanced economies has spilled over into developing ones through trade and investment channels, its nature is different. The focus in these countries should therefore be on addressing supply shocks and structural reforms, including investment in infrastructure, through a change in the fi scal mix.
Instead of focusing on predetermined fiscal targets that are unlikely to be realised, India's fiscal adjustment should be calibrated to the recovery and a rebalancing of demand from the public sector to the private. This is best done by targeting the structural rather than the cyclical fiscal deficit. There should also be a sharp shift in the composition of the deficit from consumption to addressing supply-side bottlenecks through public investment in infrastructure. Unlike public consumption which can crowd out private demand, public infrastructure investment has higher fiscal multipliers and can crowd in private investment.
The International Monetary Fund has made an assessment that an additional global fi rewall of $1.1 trillion is required to address the fallout of the eurozone crisis. But a number of very valid reasons make it clear that the European Central Bank or some other quasi-fi scal mechanism, rather than the IMF must be empowered by the eurozone authorities to provide the liquidity required. The IMF's resources should be used primarily for developing countries that lose market access to reserve currencies and need to square their international payments.
This article traces the development of the credit "storm" currently faced by western financial markets and suggests reforms that will help strengthen systems.
EASTERN UTTAR PRADESH Inundation and Backwardness Alok Sheel IT is common knowledge that the eastern Gangetic plain is excessively flood-prone. Floods are caused both by discharge from rivers, as well as by waterlogging following incessant rain. As we move eastwards along the Gangetie plain, the land gets flatter and the average precipitation increases. Rivers are consequently sluggish, change their courses frequently
