Deepak Mohanty: What should be the framework for monetary policy in
future?
Vote of thanks by Mr Deepak Mohanty, Executive Director of the Reserve Bank of India, at the
15th C D Deshmukh Memorial Lecture on "A revolution in monetary policy - lessons in the
wake of the global financial crisis" delivered by Prof Joseph Stiglitz, Mumbai, 3 January 2013.
* * *
Honourable Professor Joseph Stiglitz, Governor Dr. Subbarao, distinguished guests and
colleagues from the Reserve Bank.
Central banks have come under severe intellectual scrutiny ever since the global crisis, even
as they have crossed all conventional barriers in responding to the crisis. Monetary policy
was partly blamed for the genesis of the crisis, and it continues to be blamed for
ineffectiveness in giving us a durable recovery. We need nothing short of a revolution to
make monetary policy more relevant. Two major forces playing out since the crisis could aid
this revolution: First, the innovative response of advanced country central banks to ensure
that this time it should be different from the Great Depression. Second, the animated
academic debate amongst the best minds in economics and finance, led by Nobel laureates
like Prof Stiglitz, to recommend what should be the framework for monetary policy in future?
In his opening remarks, Governor Dr. Subbarao discussed the first dimension, which
included extensive reliance of advanced country central banks on quantitative and credit
easing measures, operation twist and forward guidance, to escape the theoretical limits
posed to the conventional conduct of monetary policy by the zero lower bound (ZLB). He
noted the far reaching changes emerging in the recent period in monetary policy frameworks
of advanced country central banks, with the Fed announcing an explicit target for
unemployment; the Bank of England examining possible replacement of inflation targeting
with nominal income targeting, and the Bank of Japan being expected to respond to
prolonged deflation by accepting a higher explicit inflation target.
Emerging market central banks, despite the pre-crisis best practices, generally preferred to
continue with multiple objectives, which included financial stability, and also tried to manage
the impossible trinity, with country specific approach to exchange rate regimes and capital
account. After the global crisis, the spillovers form ultra-accommodative monetary policies in
advanced economies have amplified the challenge from the impossible trinity, besides
increasing commodity price pressures. Governor, Dr. Subbarao, encapsulated in his remarks
the complex nature of the issues involved in the recent innovations in the conduct of
monetary policy, most of which could be experiments, and how these may influence the
mainstream monetary policy frameworks, going ahead.
Here, one has to look up to guidance from eminent thinkers like Prof Stiglitz. In today's CD
Deshmukh lecture, he unraveled fifteen attributes for monetary policy architecture post-crisis.
While each of these recommendations would need to be discussed and understood in the
country specific context, some of them are clearly path-breaking and thought-provoking.
First, his boarder definition of monetary policy also included financial regulatory policy. The
argument here is that what matters for the real economy is lending rates and availability of
finance. While monetary policy affects both, regulation can improve the access to credit and
terms of credit.
Second, faith in the invisible hand and excessive reliance on market efficiency should not
blind side central banks to the possibility of market failures.
Third, a central bank should not be reluctant to use all possible instruments available at its
disposal, constrained by the notion that only rate-based policy is more efficient.
Fourth, macro-prudential regulation is necessary to deal with asset bubbles and
macroeconomic volatility.
Fifth, monetary policy should be sensitive to distributional consequences.
Sixth, national monetary policy should stand ready to address globalization-induced
spillovers, and in this context capital control should very much be a part of the policy toolkit.
Most of the recommendations of Prof Stiglitz are intuitively appealing to many of us in
emerging and developing economies. In India, we have a multiple-objectives and
multiindicators approach to the conduct of monetary policy. While price stability remains the
dominant objective, financial stability has been recognized an explicit objective of monetary
policy. We have used macro-prudential measures even before the crisis as a stabilization
instrument. Our approach to financial sector reforms and liberalization of the capital account
has been cautious and gradual. We recognize that improving access to credit to certain
sectors through sector specific policies should be integral to monetary policy. We are also
vigorously pursuing financial inclusion as an intermediate objective to promote inclusive
growth.
We, in the Reserve Bank, would need to reflect more closely on the key messages from
Prof Stiglitz to strengthen the micro-foundations of macro-economic policies. For a large and
diverse economy of over 1.2 billion populations, micro-foundation of monetary policy is
indeed a major challenge for us.
Ladies and Gentlemen, I extend my sincere thanks to Prof. Joseph Stiglitz for having
accepted our invitation to deliver the Fifteenth C. D. Deshmukh Memorial Lecture, and
leaving with us very thought provoking ideas, which I am sure would trigger further debate
and research, not only in the Reserve Bank, but globally.
I thank Mrs. Anya Stiglitz for her gracious presence. I thank the family members of late
Dr. C. D. Deshmukh for kindly gracing the occasion.
The successful conduct of this programme owes much to the guidance and keen interest of
our Governor, Dr. D. Subbarao, and I thank him for that.
I thank all the distinguished invitees present here for attending the function with great
enthusiasm. I thank all my colleagues from the Reserve Bank for their overwhelming
participation. I thank the event management team of the Taj Hotel and all other service
providers for their support. I thank the liaison officers of the Bank for their cooperation.
Finally, I must thank Adviser K U B Rao and his team from the Department of Economic
Policy and Research (DEPR) for meticulously planning every aspect of this programme so
well.
Thank you all, once again.