impact of monetary policy on indian economy in the post-reform period

orderly conditions in the foreign exchange market and containing the <strong>impact</strong> <strong>of</strong>
exchange rate pass-through effect on domestic inflation. Real shocks are predominantly
responsible for movements in real as well as nominal exchange rate, <strong>monetary</strong> <strong>policy</strong>
shocks have been relatively unimportant. A <strong>policy</strong> <strong>of</strong> benign neglect <strong>of</strong> the exchange
rate is impractical and unrealistic since movements in exchange rate influence the
<strong>monetary</strong> transmission. Overall, the analysis indicates that exchange rate management
in India has been consistent with macroeconomic stability.
Philip Arestis and Malcolm Sawyer, (2003) (63) in their paper discuss the
following: When the level <strong>of</strong> aggregate demand is stable and only effected by random
shocks and the rate <strong>of</strong> interest, then <strong>monetary</strong> <strong>policy</strong> (in the form <strong>of</strong> varying the rate <strong>of</strong>
interest) may be an effective way <strong>of</strong> <strong>of</strong>fsetting those shocks. This, however, is
predicated on the rate <strong>of</strong> interest that would equate aggregate demand with supply-side
equilibrium, being achievable (that is positive and consistent with exchange rate
requirements). But the power <strong>of</strong> <strong>monetary</strong> <strong>policy</strong> needs to be compared with the power
<strong>of</strong> fiscal <strong>policy</strong>. In this paper, it is argued that shifts in the level <strong>of</strong> aggregate demand
(arising from shifts in confidence and world demand) cannot be readily <strong>of</strong>fset by
<strong>monetary</strong> <strong>policy</strong>. Further, fiscal <strong>policy</strong> remains a potent tool for <strong>of</strong>fsetting major
changes in the level <strong>of</strong> aggregate demand.
Robert Nobay and David Peel (2003) (64) consider optimal <strong>monetary</strong> <strong>policy</strong> in
the context <strong>of</strong> the central bank adopting an asymmetric objective function. The results
show that under asymmetric preferences, many <strong>of</strong> the extent results on the time
consistency problem need no longer hold. In this paper, they have investigated the
implications for optimal discretionary <strong>policy</strong> <strong>of</strong> assuming that the central bank has an
asymmetric loss function. The results presented in this paper underline the fact that
even limited realism beyond the conventional approach to modeling the authorities‘
preferences can deliver results that are substantively at variance with the results
obtained under quadratic preferences.
The working paper published by The Levy Economics Institute <strong>of</strong> Bard
College (2003) (65) considers the nature and role <strong>of</strong> <strong>monetary</strong> <strong>policy</strong> when money is
envisaged as credit money endogenously created within the private sector, i.e., by the
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