Exchange rate regimes and inflation: Evidence from India

Biswajit Mohanty and N R Bhanumurthy

Working Papers from National Institute of Public Finance and Policy

Abstract: Exchange rate stability is crucial for inflation management as a stable rate is expected to reduce domestic inflation pressures through a `policy discipline effect'- restricting money supply growth, and a `credibility effect'- inducing higher money demand and reduced velocity of money. Alternatively, the impossibility trillema predicts that in the presence of an open capital account, a stable exchange rate may lead to lack of control on monetary policy and, hence, higher inflation. Using a monetary model of Inflation, this paper investigates the impact of the de facto stable exchange rate regime on inflation in India during different episodes of exchange rate stability. The results show that the impact of exchange rate regime on inflation is not visible in Indian case, which could be because of the offsetting sterilization policy undertaken by Reserve Bank of India (RBI) during expansionary money supply growth resulting from its large scale intervention to even out exchange rate volatility.

Keywords: Exchange rate regime; Inflation; Money Supply; ARDL Model; India (search for similar items in EconPapers)
JEL-codes: E52 F33 F41 (search for similar items in EconPapers)
Pages: 24
Date: 2014-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: Working Paper 130, 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Journal Article: Exchange Rate Regimes and Inflation: Evidence from India (2014)
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