PROJECT-EFFECT OF MONETARY POLICY ON BUSINESS ENVIRONMENT

IMF WORKING PAPER ON MONETARY POLICY COORDINATION AND THE ROLE OF CENTRAL BANKS

Submitted by

Ashrav Gupta (11108009)

Summary-Conventional wisdom suggests that the central banks should control inflation in their respective economies through short term instruments but the

economic crisis of 2008 led to a departure from this with the advanced economies or so called developed countries like the US following various rounds of

quantitative easing through asset buying and thus increasing the liquidity in their respective market leading to inflationary pressures. The unconventional monetary

policies pursued by the advanced economies have posed macroeconomic challenges for the emerging market economies like India through volatile capital flows and exchange rates. These have caused the appreciation and depreciation

of currency of emerging markets based on cycles of quantitative easing and tapering respectively highly. Statements made by the our RBI governor recently also have expressed caution in lowering the interest rates to accommodate for

the quantitative tapering programme of the US Federal Reserve which may take place soon based on recent headlines. The paper in this regard looks at the need

for advanced economies central banks to acknowledge and appreciate the spillovers resulting from such unconventional monetary policies. Central banks of the advanced economies, who have set up standing mutual swap facilities, should explore similar arrangements with other significant emerging market economies

with appropriate risk mitigation measures. These initiatives could do much to actually curb volatility in global financial markets and hence in capital flows to

emerging market economies thus obviating the need for defensive policy actions on the part of emerging market economies.