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Evolving Contours of Monetary Policy
Monetary policy has emerged as an important tool of economic policy both in developed and developing economies. The monetary and financial system is far more complex today than it has been in the past. Financial intermediation has reached a high level of sophistication, which has itself become a source of concern. The impact of monetary policy action can be transmitted through a variety of channels, some of which though recognised in the past, have become more important. While the traditional issues such as the objectives of monetary policy and the possible trade-off among them remain relevant, they need to be related to the far-reaching changes in the institutional environment at home and abroad. The changing objectives of monetary policy, newly evolving instruments of monetary control and the transmission mechanism and issues related to autonomy in the pursuit of monetary policy are examined.
This is an extended and updated version of the presidential address of the Centenary Conference of the Indian Economic Association held at Guntur, Andhra Pradesh in 2017.
Monetary policy continues to remain as an important tool of economic policy both in developed and developing economies. It is clear that the challenges for monetary policy have been changing over time, even though some basic issues have remained of perennial concern. As the institutional environment both domestic and global changes, the tasks of monetary policy also undergo a change. The monetary and financial system is far more complex today than it has been in the past. Financial intermediation has reached a high level of sophistication, which has itself become a source of concern in recent days. The menu of financial products available has expanded enormously. All these changes have an important role to play in relation to the transmission mechanism. The impact of monetary policy action can be felt through a variety of channels, some of which though recognised in the past, have become more important. The speed with which funds can move across borders has raised issues regarding the coordination of monetary policies among countries. While the traditional issues such as the objectives of monetary policy and the possible trade-off among them remain relevant, they need to be related to the far-reaching changes in the institutional environment at home and abroad.
Monetary policy has had its ups and downs in post-World War II period. In industrially advanced countries, after decades of eclipse, monetary policy re-emerged as a potent instrument of economic policy, in the fight against inflation in the 1980s. Issues relating to the conduct of monetary policy came to the forefront of policy debates at that time. The relative importance of growth and price stability as the objective of monetary policy as well as the appropriate intermediate target of monetary policy became the focus of attention. The recent churning of the financial system has raised several new questions not only with respect to the objectives but also to the role of money itself in monetary policy. A similar trend regarding monetary policy is discernible in developing economies as well.
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