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Does Globalization Cause the Loss of Monetary-Policy Independence in Developing Economies? A Case Study with India

Biru Paksha Paul
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Biru Paksha Paul: State University of New York at Binghamton

A chapter in Proceedings of the International Conference on Globalization and Its Discontents, 2007, pp 186-207 from Izmir University of Economics

Abstract: This paper examines whether globalization causes the loss of monetary-policy independence in developing economies. By using India as a case study we find that globalization does not necessarily cause the loss of monetary-policy independence. A country with foreign exchange constraints may lose its monetary-policy independence even in the absence of globalization under limited capital flows as long as it attempts to maintain a fixed or a stable exchange rate. This was the case in the 1960s when India controlled capital flows, maintained a fixed exchange rate, and Indian interest rates used to follow US interest rates in a significant way. In contrast, a country can exercise monetary-policy independence even under free capital flows as long as it does not maintain a stable exchange rate. Thus, monetary-policy independence is anchored in the nature of the exchange-rate regime along with the state of foreign-exchange constraint, and not necessarily in globalization per se.

Keywords: globalization; Monetary-Policy Independence; developing economies; India (search for similar items in EconPapers)
Date: 2007
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