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Off-target on Monetary Policy
Disregarding international experience of recent years, the Urjit Patel Committee recommends that the Reserve Bank of India pursue a single objective of infl ation targeting. It focuses on the interest rate to control infl ation (by influencing inflation expectations), though experience has shown that in India this mechanism has a weak impact on inflation and a stronger one on output. It is a disappointing report drawing on a textbook reading of the New Keynesian model.
The events during and after the 2008 global financial crisis have undermined all certainties faced by policymakers, especially central bankers in developing countries.
To start with, the crisis questioned the belief that the United States financial system represented the best approximation of an efficient financial market with appropriate levels of competition and transparency – Glass-Steagall was no more the innovation-killing monster it had been made out to be. Second, as investors who had rushed in during the pre-crisis boom exited developing country markets to cover losses and meet commitments at home; open economic borders did not seem such a good idea. Whether located in a country that was a favourite of investors or in a market being shunned, central banks faced immense problems stabilising liberalised exchange rates (prone to excessive appreciation or depreciation) and managing their balance sheets. Working the monetary lever seemed near impossible.
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