Exchange rate regimes and inflation: Evidence from India
AbstractExchange rate stability is crucial for inflation management as a stable rate is expected to reduce domestic inflation pressures through a `policy discipline effect'- restricting money supply growth, and a `credibility effect'- inducing higher money demand and reduced velocity of money. Alternatively, the impossibility trillema predicts that in the presence of an open capital account, a stable exchange rate may lead to lack of control on monetary policy and, hence, higher inflation. Using a monetary model of Inflation, this paper investigates the impact of the de facto stable exchange rate regime on inflation in India during different episodes of exchange rate stability. The results show that the impact of exchange rate regime on inflation is not visible in Indian case, which could be because of the offsetting sterilization policy undertaken by Reserve Bank of India (RBI) during expansionary money supply growth resulting from its large scale intervention to even out exchange rate volatility.
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Bibliographic InfoPaper provided by National Institute of Public Finance and Policy in its series Working Papers with number 14/130.
Date of creation: Jan 2014
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Note: Working Paper 130, 2014
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Exchange rate regime ; Inflation ; Money Supply ; ARDL Model ; India;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-08 (All new papers)
- NEP-CBA-2014-02-08 (Central Banking)
- NEP-MAC-2014-02-08 (Macroeconomics)
- NEP-MON-2014-02-08 (Monetary Economics)
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