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Capital Controls, Exchange Rate Regime and Monetary Policy Independence in India

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  • Ghosh, Amit

    ()
    (Department of Economics, Illinois Wesleyan University)

  • Ghosh, Ramya

    ()
    (Department of Economics & International Business LeBow College of Business Drexel University)

Abstract

An enduring challenge that policy makers in open economies confront is the choice between three desirable, yet jointly unattainable objectives of maintaining a fixed exchange rate regime, free international capital flows and monetary policy independence. This paper examines these three tenets of the ‘policy trilemma’ for India over its post liberalization period. We first construct a new measure of capital controls, documenting an easing of restrictions on capital flows over time. Next, we find the de facto evolution of India’s exchange rate regime to move towards a greater degree of flexibility with declining weights attached to the US dollar. Finally, we reveal India to preserve her monetary policy sovereignty over the post-liberalization period with a slight increase in such independence after the turn of the millennium. We note the findings of this study to be in line with the predictions of the trilemma.

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Bibliographic Info

Paper provided by LeBow College of Business, Drexel University in its series School of Economics Working Paper Series with number 2012-17.

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Length: 26 pages
Date of creation: 01 Sep 2012
Date of revision:
Handle: RePEc:ris:drxlwp:2012_017

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Web page: http://www.lebow.drexel.edu/
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Keywords: Exchange rate regimes; Capital controls; Monetary policy independence; Policy trilemma; Emerging economy;

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