The path of impossible trinity in India: 1991-2018

Harpreet Singh Grewal and Pushpa Trivedi

Global Business and Economics Review, 2021, vol. 24, issue 4, 382-408

Abstract: To test the existence of impossibility trinity constraint in the Indian context, we build three impossible trinity indices, viz., capital account openness, monetary independence and exchange rate stability using data for the period 1991-2018. We find the evidence on the existence of the trilemma where the constraint increases with rise in capital account openness. We also find that monetary independence comes at the cost of exchange rate stability. Our results on the implications of movements in trilemma in the presence of international reserves on inflation suggest that exchange rate stability has been effective in reducing inflation in India and remains a dominant policy choice. A rise in the flows of international reserves, however, could increase inflation, albeit the effect is negligible, reflecting inadequate sterilisation operations by the central bank.

Keywords: capital account openness; capital mobility; exchange rate stability; ERS; Forex reserves; impossible trinity; India; inflation; international reserves; monetary policy independence; Mundell-Fleming model; trilemma. (search for similar items in EconPapers)
Date: 2021
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