An Analysis on the Assessment and Reforms of Monetary/Credit Policy System In Rising Financial Systems

Analyzing the Impact of Monetary/Credit Policy Reforms in Rising Financial Systems

Abstract

In a developing economy, monetary policy has a special role to play.The aim of Monetary Policy is to control the supply of money, often targeting arate of interest for the purpose of promoting economic growth and stability.The official goals usually include relatively stable prices and lowunemployment. Monetary Policy is related to the availability and cost of moneysupply in the economy in order to attain certain broad objectives. The ReserveBank of India keeps control on the supply of money to attain the objectives ofits Monetary Policy. Monetary policy in India has moved towards an increasingly flexibleexchange rate regime without any explicit framework for an alternative nominalanchor. The failure of monetary policy to anchor inflationary expectations ofagents, coupled with negative supply shocks has kept inflation above theacceptable range of 5-5.5% for last five years in India. In this paper we present a model for policy analysis for India thatprovides insights in the setting of an inflation targeting framework to anchorinflationary expectations. The model offers an understanding of the extent towhich various shocks, including the post-global crisis fiscal stimulus,accommodative monetary policy and ensuing decline in global demand, explaingrowth and inflation in India.