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

Articles By Monetary policy

The Reserve Bank of India’s Trilemma Choice

The Reserve Bank of India, like most central banks, has to choose between the three corners of the impossible trinity, that is, free capital flows, monetary policy independence and exchange rate stability. This article uses the Aizenman et al (2008) framework to analyse the trilemma choice of the RBI over 2000–22. The results provide interesting insights into the RBI’s shifting position in managing the impossible trinity over the years.

Unconventional Monetary Policy in Japan and the United State

When most of the advanced countries are on the recourse to exit the path of unconventional monetary policy, it is time to look at a new perspective and review the unconventional monetary policy from the lens of tool purchase by central banks under quantitative easing. The purchase of government treasuries affects risk premia and yields more compared to the purchase of private assets by central banks. But the purchase of private exchange traded funds/mortgage backed securities are important for cash-starved entrepreneurs and real-estate developers compared to government bond purchase. How India was different in practising the unconventional monetary policy is also discussed.

Monetary Policy in the Midst of Cost-push Inflation

The Reserve Bank of India adopted inflation-targeting monetary policy based on the New Keynesian 3-equation model. How realistic are the assumptions, and how effective have monetary policy instruments been in controlling the inflation rate? Given India’s structural specificities, what are the implications of cost-push inflation for policy rate and output gap? This paper addresses these questions by identifying alternative theoretical possibilities within a simple 3-equation model and locating the Indian specificity by estimating the Phillips curve and monetary policy rule equation. The analysis points towards the constraints of monetary policy in India due to presence of a flat Phillips curve and indicates the possibility of adverse effect on output gap due to presence of Taylor’s rule.

Monetary Growth, Financial Structure, and Inflation

It is argued that a key question of the operation of monetary policy is its decomposition into a price effect and an output effect. Specifically, the
association between the easing of global monetary and liquidity conditions on the one hand, and the significant spurt in inflation, on the other, in recent
times is probed to conclude that across the world, there seems to be an association. The issues of monetary stability, price stability and financial stability are also intimately interlinked.

The Making of an Economic Crisis in Pakistan

In order to break away from the neo-liberal debt servitude, Pakistan needs a strong political will to make structural changes to its political economy. Policies centred on working people and their needs should be privileged over the International Monetary Fund’s one-size-fits-all (non)-solution that it con­tinues to advocate in developing coun­tries.

Current Inflation in India

Following the standard percepts for dealing with supply shocks, monetary policy continued to be easy for an extended period, while simultaneously huge fiscal stimuli were applied. Even when a more restrictive monetary stance was taken, the measures were not strong enough to restrain inflationary expectations. A soft monetary policy with a sizeable fiscal deficit can harden inflationary expectations and a perpetuation of a new higher normal for inflation.

Monetary Aggregates

An exploration of the information content within money confirms that despite the theoretical inconsistence inherent within a simple sum monetary aggregate, money supply (M3) has been a consistent leading indicator of the general slowdown in economic activities in India since March 2010. The paper also establishes an exogenous influence of the central bank balance sheet over M3 through a statistically stable money multiplier, a long-term stable relationship, and bidirectional Granger causality between M3 and reserve money. However, the monetary policy measures of the central bank that determine reserve money themselves take a cue from economy-wide factors, as presented in a multivariate forecast model for reserve money.

Union Budget 2023–24

Consolidation is necessary, but so is stimulus. The budget ably attempts both through gradual deficit reduction and better expenditure composition. But success also needs coordination with monetary policy and with states. Further, inflation-lowering supply-side action will enable countercyclical smoothing; stronger institutions and incentives can improve state capex and public service delivery.

Monetary Policy Debates in the Age of Deglobalisation

This article is the second in a series of articles on monetary policy debates in the age when deglobalisation became a buzzword. Here, we begin our discussion of the ongoing economic experiment in Turkey as an example to elaborate on these debates. In the third article, we will turn our attention to the post-2018 Turkish currency crisis phase of the experiment by focusing on macroprudential measures, capital controls and central bank independence, as promised in the first article.