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The Theoretical Superiority of the Compensation view in Explaining Monetary Policy Autonomy

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  • Zico Dasgupta

Abstract

This paper compares three theoretical frameworks that attempt to explain the phenomenon of weak relationship between foreign and domestic interest rate under fixed or manage-float exchange rate regimes - the Mundell-Fleming (MF) model without sterilization and the Mundell-Fleming model with sterilization (MFS) and the Compensation view. It argues for the theoretical superiority of the Compensation view as it can explain monetary policy autonomy under less restrictive assumptions. The paper outlines the underlying models of these frameworks and highlights the centrality of commercial bank loans in the Compensation view. I discuss the trend in India’s interest rates which is consistent with the Compensation view.

Suggested Citation

  • Zico Dasgupta, 2023. "The Theoretical Superiority of the Compensation view in Explaining Monetary Policy Autonomy," Working Papers PKWP2315, Post Keynesian Economics Society (PKES).
    • Handle: RePEc:pke:wpaper:pkwp2315
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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