ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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A Perspective

Monetary Policy Underpinnings

The objective of this paper is to capture the historical perspective in respect of monetary policy underpinnings with particular reference to India, the limitations and constraints in pursuing monetary policy objectives and throw light on current mainstream economic thinking and perspective in the context of changing economic environment worldwide.

Charles A E Goodhart, in his recent Deshmukh Memorial Lecture has mentioned that one of the greater pleasures of the last decade has been that the gap, initially a chasm, between academic monetary economists (read theorists) and Bank economists (read practitioners) has virtually disappeared. I am not sure how far this is true and acceptable. While there is always a relationship between theory and practice, there may not be any one-to-one correspondence between the developments in theoretical perspectives and policy implementation by practitioners in the government or the central bank. Whereas, theories raise fundamental questions about the functioning of the system and enunciate a model or behavioural laws under certain assumptions, practitioners generally rely on historical perspectives and experience as guide posts. Policies are more often based upon sound judgments and taking into account the economic milieu in combination with socio-political compulsions and circumstances. Therefore, policies evolve contextually to the particular environment. Naturally, policies cannot be understood or explained without reference to geographical location, historical context and overall environment.

It may be a useful idea to compare or differentiate the policy-making and policy prescriptions with theoretical propositions on the basis of what is happening for instance, in the field of medicine (such a comparison is not any less meaningful. We have historical instances like relations between Harvey’s discovery of ‘Circulation of Blood’ and Physiocrats’, ‘Tableaue Economique’ and between Darwin’s Theory of Natural Selection and Malthus’ Essay on Population and current influence of ‘Biometrics’ on ‘Econometrics’). There are different systems of medicine following their own views about human physiology. The ‘transmission channel’ of a cure for a particular prescription differs from system to system. For instance, the allopathic system may view the physiology in a relatively mechanical way treating the human body as akin to a mechanical device. On the other hand, the homeopathic system establishes a link between mind and body and the prescription differs from person to person depending upon the person’s history both from physiological and psychological angles. The same argument can be extended to other systems of medicine like ayurvedic, etc, following their own prescriptions. ‘Faith healing’ is another area comparable to only ‘moral suasion’.

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