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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

Author

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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.

Suggested Citation

  • Biru Paksha Paul, 2007. "Does Globalization Cause the Loss of Monetary-Policy Independence in Developing Economies? A Case Study with India," Papers of the Annual IUE-SUNY Cortland Conference in Economics, in: Oguz Esen & Ayla Ogus (ed.), Proceedings of the Conference on Globalization and Its Discontents, pages 186-207, Izmir University of Economics.
    • Handle: RePEc:izm:prcdng:200712
    as

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    References listed on IDEAS

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