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

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Contemporary Macroeconomic Analysis

Looking Back at Macroeconomics 101: A Ringside View of the Global Financial Crisis from Asia in Real Time by Alok Sheel; Academic Foundation, 2015; pp 422, ₹1,295.

Financial Sector Reforms

Unified Financial Code: Is India Ready? A Critique on the Financial Sector Legislative Reforms Commission Report by S S Tarapore; Gurgaon: LexisNexis, 2015; pp xii+166, ₹295.

Procyclical Credit Growth and Bank NPAs in India

Despite recent monetary policy accommodation, bank credit growth continues to decelerate in India, partly due to huge non-performing asset overhangs in banks. This paper explores various issues related to surging NPAs in banks and observes that excessive credit growth in the past is a major reason that has led to current NPAs. Other factors such as contemporary economic conditions, capital adequacy and overall levels of efficiency of the banks have also affected the incidence of NPAs. For promoting financial stability and enhancing monetary policy effectiveness, it is suggested that macro-prudential aspects such as counter-cyclical capital buffer and dynamic provisioning need to be strengthened. There is also a need to explore if corporate governance concerns could be instrumental in adversely impacting the loan book of state-owned banks.

Capital Account Management in India

India has been subject to capricious capital flows since its integration with the global capital markets in the early 1990s. In a bid to balance diverse objectives, India, like many other emerging markets, has resorted to active management of various types of capital flows. This paper finds that while the calibrated liberalisation approach resulted in altering the composition of capital flows towards more stable flows, and has helped India to negotiate the "Trilemma," the use of sporadic capital account management measures in the face of surge or stop of capital flows has not been very effective in achieving their objectives of reducing external vulnerability or mitigating macro-prudential risks.

Monetary Policy Dilemmas at the Current Juncture

Monetary policies in advanced economies and emerging markets face quite different challenges at the current juncture. In the advanced countries, current dilemmas derive from the normalisation of unconventional monetary policies. The short-term dilemma is to determine when to start exiting extraordinary policies and selecting appropriate tools, as conventional tools may not be very relevant during this phase. The medium- to long-term challenges relate to the sequencing, pace and mechanics of normalisation. Monetary policy in emerging markets needs to cope with the familiar dilemmas of fiscal dominance, the growth-inflation trade-off and the "impossible trinity." With fiscal parameters in control, and food and commodity prices subdued, the chief dilemma currently confronting emerging markets involves a trade-off between targeting divergent domestic and external cycles. Although they are now better placed to absorb a sudden stop, the impact is likely to be differential, with those with weaker macroeconomic parameters suffering greater pain.

Dynamic Stochastic General Equilibrium Modelling

In recent years Dynamic Stochastic General Equilibrium models have come to play an increasing role in central banks, as an aid in the formulation of monetary policy (and increasingly after the global crisis, for maintaining financial stability). DSGE models, it is claimed, are less a-theoretic than other widely used models such as VAR, or dynamic factor models. As the models are "structural," they are supposed to be immune to the Lucas Critique, and thus can be "taken to the data" in a meaningful way. However, a major feature of these models is that their theoretical underpinnings lie in what has now come to be called as the New Consensus Macroeconomics. Using the prototype real business cycle model as an illustration, this paper brings out the econometric structure underpinning such models. A detailed analytical critique is also presented together with some promising leads for future research.

The New Keynesian Paradigm of Monetary Policy

While Keynes was sceptical of the efficacy of monetary policy , the current mainstream macroeconomic consensus , "New" Keynesian macroeconomics , accords it primacy in the process of maintaining both price and output stability. This consensus depends on three relationships: demand is inversely dependent on the interest rate, inflation is positively related to the output gap and the central bank can control interest rates to achieve an optimum combination of price and output. This paper presents a theoretical critique of this consensus from an "old" Keynesian perspective since Keynes had raised fundamental objections to each of the three relationships .

Financial Reforms in an Endogenous Money Economy

An examination of the Reserve Bank of India's monetary policy leaves little doubt that India can be suitably characterised as an endogenous money economy. In an endogenous money environment, financial reforms will prove ineffective in stimulating credit supply to large commercial borrowers. They may, however, prove counterproductive by sharpening the credit constraints faced by agricultural and other petty producers in the economy.

Strengthening Dynamic Role of Monetary Policy

The repo rate exceeding the overnight call money rate continuously for months and the forward premia for the US dollar in the domestic forex market dipping below interest rate differentials may be said to reflect loss of effectiveness of monetary instruments. To restore the dynamic aspect of monetary policy, action on three fronts is called for.

Exchange Rate Policy and Management

The objective of this study is to present the Indian experience of exchange rate management against the backdrop of international developments both at the theoretical and empirical levels. No single exchange rate regime is most appropriate for all countries and the regime that is appropriate for a particular country may change over time. The stated objective of India�s exchange rate policy is managing volatility with no fixed rate target while allowing the underlying demand and supply conditions to determine exchange rate movements over a period. Against this background, the empirical exercise undertaken indicates that monetary policy has been successful in ensuring orderly conditions in the foreign exchange market and containing the impact of exchange rate pass-through effect on domestic inflation. Real shocks are predominantly responsible for movements in real as well as nominal exchange rate; monetary policy shocks have been relatively unimportant. Deviations from uncovered interest parity can be observed suggesting role for sterilised foreign exchange market intervention in ensuring orderly conditions; at the same time, the excess returns are insignificant and get eliminated relatively quickly. Overall, the analysis indicates that exchange rate management in India has been consistent with macroeconomic stability.

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