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Examining the trade-off between price and financial stability in India

Ila Patnaik (), Shalini Mittal () and Radhika Pandey ()
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Shalini Mittal: National Institute of Public Finance and Policy

Working Papers from National Institute of Public Finance and Policy

Abstract: In recent years, many emerging economies including India have adopted inflation targeting framework. Post the global financial crisis, there is a growing debate on whether monetary policy should target financial stability. Using India as a case study, we present an empirical approach to assess whether monetary policy can target financial stability. This is done by examining the trade-off between price and financial stability for India. Using correlation between price and financial cycles, we find that a trade-off exists between price and financial stability. Our finding is robust to a series of robustness checks. Our study has implications for the conduct of monetary policy in emerging economies. Presence of a trade-off may constrain the ability of a central bank in emerging economies to target financial stability with monetary policy instrument.

Pages: 30
Date: 2019-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: Working Paper 248, 2019
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