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Does Globalization Cause the Loss of Monetary-Policy Independence in Developing Economies? A Case Study with India

In: Proceedings of the Conference on Globalization and Its Discontents

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Biru Paksha Paul (State University of New York at Binghamton)
Abstract

This paper examines whether globalization causes the loss of monetary-policy independence in developing economies. By using India as a case study we find that globalization does not necessarily cause the loss of monetary-policy independence. A country with foreign exchange constraints may lose its monetary-policy independence even in the absence of globalization under limited capital flows as long as it attempts to maintain a fixed or a stable exchange rate. This was the case in the 1960s when India controlled capital flows, maintained a fixed exchange rate, and Indian interest rates used to follow US interest rates in a significant way. In contrast, a country can exercise monetary-policy independence even under free capital flows as long as it does not maintain a stable exchange rate. Thus, monetary-policy independence is anchored in the nature of the exchange-rate regime along with the state of foreign-exchange constraint, and not necessarily in globalization per se.

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This chapter was published in: Biru Paksha Paul Proceedings of the Conference on Globalization and Its Discontents, , pages 186-207, 2007.

This item is provided by Izmir University of Economics in its series Papers of the Annual IUE-SUNY Cortland Conference in Economics with number 200712.

Handle: RePEc:izm:prcdng:200712

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Related research
This chapter was published in the following book, which is listed on IDEAS:
Oguz Esen & Ayla Ogus (ed.), 2007. "Proceedings of the International Conference on Globalization and Its Discontents," Proceedings of the IUE-SUNY Cortland Conference in Economics, Izmir University of Economics, number 2007, November. [Downloadable!]
Keywords: globalization; Monetary-Policy Independence ; developing economies; India;

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  1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May. [Downloadable!] (restricted)
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  2. Maurice Obstfeld & Alan M. Taylor, 2003. "Globalization and Capital Markets," NBER Chapters, in: Globalization in Historical Perspective, pages 121-188 National Bureau of Economic Research, Inc. [Downloadable!]
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  3. Mohammed I. Ansari & Ira. N Gang, 1999. "Liberalization Policy: ‘Fits & Starts' Or Gradual Change In India," Departmental Working Papers 199907, Rutgers University, Department of Economics. [Downloadable!]
  4. Nadeem Ul Haque & Peter Montiel, 1990. "Capital Mobility in Developing Countries - Some Empirical Tests," IMF Working Papers 90/117, International Monetary Fund.
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