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Monetary Policy, Capital Flows, And The Exchange Rate

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  • Partha Sen

    (Department of Economics, Delhi School of Economics, Delhi, India)

Abstract

The use of monetary policy in India has been constrained by a loose fiscal policy and capital flows. Capital inflows have the potential to cause a Dutch Disease-type situation. The RBI has carried out sterilized intervention to prevent this. In spite of this, the trade balance and, more often than not, the current account continue to be in deficit. Thus the real exchange rate, in spite of the intervention, is inconsistent with external balance (defined as a manageable current account deficit). The problem of capital flows is a self-inflicted pain. The authorities could have kept a lid on capital flows, allowing only the most urgent inflows from a growth standpoint. It would have had a competitive edge in manufacturing. This would have allowed it to expand labor-intensive industry and help mitigate the massive poverty levels.

Suggested Citation

  • Partha Sen, 2010. "Monetary Policy, Capital Flows, And The Exchange Rate," Working papers 193, Centre for Development Economics, Delhi School of Economics.
  • Handle: RePEc:cde:cdewps:193
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    File URL: http://www.cdedse.org/pdf/work193.pdf
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    References listed on IDEAS

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    1. Claustre Bajona & Timothy Kehoe, 2010. "Trade, Growth, and Convergence in a Dynamic Heckscher-Ohlin Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 487-513, July.
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    Cited by:

    1. Hubert Gabrisch, 2015. "Net Capital Flows To And The Real Exchange Rate Of Western Balkan Countries," Economic Annals, Faculty of Economics, University of Belgrade, vol. 60(205), pages 31-52, April – J.

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