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Financial Liberalisation and Monetary Policy

Author

Listed:
  • D.M. Nachane

    (D.M. Nachane is Senior Professor, Indira Gandhi Institute of Development Research, Mumbai, India, e-mail: nachane@hotmail.com)

  • Nishita Raje

    (Nishita Raje is with the Reserve Bank of India, Mumbai.)

Abstract
It is generally believed that financial liberalisation erodes the potency of monetary policy by rendering tenuous the link between monetary aggregates and important macro-economic magnitudes (such as income, prices and exchange rates). This could be accounted for by several factors such as the blurring of the distinction between money and near-money, the breakdown of the money demand function and the easing of credit and liquidity constraints. This hypothesis has been tested in the context of developed economies, where it has derived a measure of support. However, the empirical evidence to test this proposition is somewhat scanty, in the context of less developed countries (LDCs) and emerging market economies (EMEs). This article uses a Structural Vector Auto Regressive (SVAR) model to address this problem in the Indian context over the period January 1980 to August 2004. Using monthly data separate SVAR models are estimated for the pre-liberalisation (1980:03 to 1991:12) and post-liberalisation phases (1992:01 to 2004:08), with a view to recording differential responses (if any) of industrial output, exchange rates and prices to changes in monetary impulses. The analysis brings out that some, though not substantial, differences are evident in this regard over the two periods. The article concludes by spelling out certain reorientations necessary in the conduct of monetary policy in a financially liberalised environment.

Suggested Citation

  • D.M. Nachane & Nishita Raje, 2007. "Financial Liberalisation and Monetary Policy," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 1(1), pages 47-83, March.
    • Handle: RePEc:sae:mareco:v:1:y:2007:i:1:p:47-83
    DOI: 10.1177/097380100600100103
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    References listed on IDEAS

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    Cited by:

    1. Pami Dua & Nishita Raje, 2010. "Determinants of Weekly Yields on Government Securities in India," Working Papers id:2834, eSocialSciences.

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    More about this item

    Keywords

    Liberalisation; Monetary Policy; SVAR; Output Puzzle; Price Puzzle; JEL Classification: E32; JEL Classification: C32;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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