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Examining the trade-off between price and financial stability in India

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  • Patnaik, Ila

    (National Institute of Public Finance and Policy)

  • Mittal, Shalini

    (National Institute of Public Finance and Policy)

  • Pandey, Radhika

    (National Institute of Public Finance and Policy)

Abstract

In recent years, many emerging economies including India have adopted inflation targeting framework. Post the global financial crisis, there is a growing debate on whether monetary policy should target financial stability. Using India as a case study, we present an empirical approach to assess whether monetary policy can target financial stability. This is done by examining the trade-off between price and financial stability for India. Using correlation between price and financial cycles, we find that a trade-off exists between price and financial stability. Our finding is robust to a series of robustness checks. Our study has implications for the conduct of monetary policy in emerging economies. Presence of a trade-off may constrain the ability of a central bank in emerging economies to target financial stability with monetary policy instrument.

Suggested Citation

  • Patnaik, Ila & Mittal, Shalini & Pandey, Radhika, 2019. "Examining the trade-off between price and financial stability in India," Working Papers 19/248, National Institute of Public Finance and Policy.
    • Handle: RePEc:npf:wpaper:19/248
    Note: Working Paper 248, 2019
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    1. Akhmad Syakir Kurnia & Syahid Izzulhaq & Johan Beni Maharda & Agung Kunaedi, 2021. "Inflation and Financial Stability Trade‐off: Role of Monetary Policy Credibility and Fiscal Cyclicality," Economic Papers, The Economic Society of Australia, vol. 40(1), pages 31-53, March.

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