Monetary Economics

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 .

This paper argues that cooperative banks face higher risk of failure than commercial banks, due to softer regulatory and supervisory arrangements, highly impaired capital and asset structure, inadequate corporate governance and lack of professionalism. Yet, these two sets of banks have been clubbed together in the same rights and capacity under a unified deposit insurance scheme. The Deposit Insurance and Credit Guarantee Corporation is making huge payments on account of failure of cooperative banks and this is threatening the viability of the deposit insurance system and thereby financial stability of the country. Though there are numerous problems in extending deposit insurance cover to cooperative banks even under a separate scheme, still there may be compulsions to do so. For the viability and effectiveness of the deposit insurance system for cooperative banks, it is essential that the deposit insurance system be set up within a prudential framework. However, such an arrangement may entail significant increase in the deposit insurance premium payable by cooperative banks.