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Challenges to Monetary Policy from Financial Globalization; The Case of India

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  • Ananthakrishnan Prasad
  • Charles Frederick Kramer
  • Helene Poirson Ward

Abstract

The question of how India should adapt monetary policy to ongoing financial globalization has gained prominence with the recent surge in capital inflows. This paper documents the degree to which India has become financially globalized, both in absolute terms and relative to emerging and developed countries. We find that despite a relatively low degree of openness, India's domestic monetary conditions are highly influenced by global factors. We then review the experiences of countries that have adapted to financial globalization, drawing lessons for India. While we find no strong relationship between the degree of stability in monetary conditions and the broad monetary policy regime, our findings suggest that improvements in monetary operations and communication?sometimes prompted by a shift to an IT regime?have helped stabilize broader monetary conditions. In addition, the experience of countries which used non-standard instruments suggests that room to regulate capital flows effectively through capital controls diminishes as financial integration increases.

Suggested Citation

  • Ananthakrishnan Prasad & Charles Frederick Kramer & Helene Poirson Ward, 2008. "Challenges to Monetary Policy from Financial Globalization; The Case of India," IMF Working Papers 08/131, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/131
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    1. Pasricha, Gurnain, 2007. "Financial Integration in Emerging Market Economies," MPRA Paper 5278, University Library of Munich, Germany.
    2. Husain, Aasim M. & Mody, Ashoka & Rogoff, Kenneth S., 2005. "Exchange rate regime durability and performance in developing versus advanced economies," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 35-64, January.
    3. David Vávra & Inci Ötker & Barry Topf & Zbigniew Polanski, 2007. "Coping with Capital Inflows; Experiences of Selected European Countries," IMF Working Papers 07/190, International Monetary Fund.
    4. Abdul Abiad & Enrica Detragiache & Thierry Tressel, 2010. "A New Database of Financial Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 57(2), pages 281-302, June.
    5. Robert Neil McCauley, 2006. "Understanding monetary policy in Malaysia and Thailand: objectives, instruments and independence," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy in Asia: approaches and implementation, volume 31, pages 172-198 Bank for International Settlements.
    6. Akira Ariyoshi & Andrei A Kirilenko & Inci Ötker & Bernard J Laurens & Jorge I Canales Kriljenko & Karl F Habermeier, 2000. "Capital Controls; Country Experiences with Their Use and Liberalization," IMF Occasional Papers 190, International Monetary Fund.
    7. Lucas Papademos, 2007. "The Effects of Globalization on Inflation, Liquidity and Monetary Policy," NBER Chapters,in: International Dimensions of Monetary Policy, pages 593-608 National Bureau of Economic Research, Inc.
    8. John Hawkins, 2005. "Globalisation and monetary operations in emerging economies," BIS Papers chapters,in: Bank for International Settlements (ed.), Globalisation and monetary policy in emerging markets, volume 23, pages 59-80 Bank for International Settlements.
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    Citations

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    Cited by:

    1. S. K. A. Rizvi & B. Naqvi & C. Bordes, 2013. "Time varying equity market beta as an index of financial openness?," Applied Financial Economics, Taylor & Francis Journals, vol. 23(11), pages 921-928, June.
    2. Chong, Terence Tai Leung & Zhu, Tingting & Rafiq, M.S., 2013. "Are Prices Sticky in Large Developing Economies? An Empirical Comparison of China and India," MPRA Paper 60985, University Library of Munich, Germany.
    3. Bhattacharya, Sulagna, 2009. "FULL Capital Account Convertibility:India's Readiness in the context of Financial Integration," MPRA Paper 14731, University Library of Munich, Germany.

    More about this item

    Keywords

    Domestic liquidity; Economic conditions; Capital flows; Capital inflows; Excess liquidity; Liquidity management; Monetary policy; Globalization; India; financial globalization; monetary policy framework; central bank; monetary conditions;

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