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Challenges to Monetary Policy From Financial Globalization

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Author Info

  • A. Prasad
  • Charles Frederick Kramer
  • Hélène Poirson
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    Abstract

    The question of how India should adapt monetary policy to ongoing financial globalization has gained prominence with the recent surge in capital inflows. This paper documents the degree to which India has become financially globalized, both in absolute terms and relative to emerging and developed countries. We find that despite a relatively low degree of openness, India''s domestic monetary conditions are highly influenced by global factors. We then review the experiences of countries that have adapted to financial globalization, drawing lessons for India. While we find no strong relationship between the degree of stability in monetary conditions and the broad monetary policy regime, our findings suggest that improvements in monetary operations and communication?sometimes prompted by a shift to an IT regime?have helped stabilize broader monetary conditions. In addition, the experience of countries which used non-standard instruments suggests that room to regulate capital flows effectively through capital controls diminishes as financial integration increases.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/131.

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    Length: 43
    Date of creation: 01 May 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/131

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    Related research

    Keywords: Capital flows; Excess liquidity; Liquidity management; Capital inflows; Economic conditions; Domestic liquidity; monetary policy; globalization; central bank; monetary conditions; financial globalization; foreign exchange; inflation; international financial; international financial statistics; monetary fund; foreign assets; financial markets; monetary framework; monetary policy framework; open market operations; reserve requirements; domestic monetary conditions; exchange rates; government securities; monetary targeting; financial integration; money market; monetary aggregates; reserve requirement; money stock; monetary instruments; monetary management; monetary policy strategy; international financial markets; monetary transmission; money markets; money demand; monetary condition; international liquidity; global financial system; monetary stability; net foreign assets; monetary economics; access to international financial markets; monetary authority; discount rate; long-term interest rates; monetary regime; interest rate targeting; monetary regimes; issuance of government securities; international financial integration; monetary transmission mechanism; monetary stance; monetary liquidity; monetary policy regime; monetary policy objectives; globalization proceeds; monetary policy implementation; monetary independence; money market interest rates; monetary authority of singapore; monetary policy transparency; capital markets; monetary policy operating procedures; international balance sheet;

    This paper has been announced in the following NEP Reports:

    References

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    1. David Vávra & Inci Ötker & Barry Topf & Zbigniew Polanski, 2007. "Coping with Capital Inflows," IMF Working Papers 07/190, International Monetary Fund.
    2. Enrica Detragiache & Abdul Abiad & Thierry Tressel, 2008. "A New Database of Financial Reforms," IMF Working Papers 08/266, International Monetary Fund.
    3. Akira Ariyoshi & Andrei Kirilenko & Inci Ötker & Bernard Laurens & Jorge Iván Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls," IMF Occasional Papers 190, International Monetary Fund.
    4. Pasricha, Gurnain, 2007. "Financial Integration in Emerging Market Economies," MPRA Paper 5278, University Library of Munich, Germany.
    5. Robert Neil McCauley, 2006. "Understanding monetary policy in Malaysia and Thailand: objectives, instruments and independence," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in Asia: approaches and implementation, volume 31, pages 172-198 Bank for International Settlements.
    6. Lucas Papademos, 2007. "The Effects of Globalization on Inflation, Liquidity and Monetary Policy," NBER Chapters, in: International Dimensions of Monetary Policy, pages 593-608 National Bureau of Economic Research, Inc.
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    Cited by:
    1. Bhattacharya, Sulagna, 2009. "FULL Capital Account Convertibility:India's Readiness in the context of Financial Integration," MPRA Paper 14731, University Library of Munich, Germany.

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