We recognised much earlier on that the inflation targeting framework is not well-suited to our domestic conditions as it can compound the risks of unfettered capital flows. Instead, we believed that destabilising capital flows need to be effectively managed to ensure orderly domestic conditions. It did not help that some economies even hosted illegal NDF activities that had grave spillover implications on neighbouring economies. The fact that multilateral institutions are oblivious to these damaging consequences to some of their member countries is very disquieting. A further point is the dangers that can arise when inflation targeting inappropriately shifts the burden onto monetary policy to solve problems that in reality, require much broader policy responses on the fiscal side. When much needed actions are postponed, it has important consequences for our long term growth potential. Inflation targeting framework falling under heavy scrutiny As it turns out, our choice of not conforming to the norm was not in vain. Inflation targeting is now under scrutiny as its merits are debated widely. Many of these discussions centered on the waning effectiveness of the framework and the need for additional policy instruments to make the framework effective. The sequence of events leading up to the Great Financial Crisis raised the argument that an exclusive focus on achieving the inflation target could cause policymakers to overlook other vulnerabilities, such as credit and asset price bubbles. Delivering on inflation targets itself has also presented new challenges.

It was also subject to favouritism and abuse. Lawyers and businessmen began to find legal loopholes allowing them to found companies while remaining unincorporated. These unincorporated entities  3  Chief Justice Coke set out how “lawful authority of incorporation…may be by four means[:]…by the Common Law, as the King himself;…by authority of Parliament; by the King’s Charter; and by prescription.” See Hunt (1936), and http://oll.libertyfund.org/titles/911/106352#lf0462-01_head_102  4  http://www.bankofengland.co.uk/about/Documents/legislation/1694charter.pdf  5  http://www.bankofengland.co.uk/about/Documents/legislation/1694act.pdf  2  BIS central bankers’ speeches  were generally small partnerships, whose members both owned and controlled the company and faced unlimited liability. This model was an incentive-compatible one. It delivered a close alignment between the interests of directors and shareholders – typically, they were one and the same. Meanwhile, unlimited liability created sharp incentives among owners to avoid insolvency as typically their very livelihoods depended on it. And this, in turn, helped protect wider stakeholders, including creditors and customers, from company risk. From unlimited to limited liability Times were, however, changing. Approaching the middle of the 19th century, the era of mass industrialisation was dawning. Pressures to expand companies, financed by larger pools of capital, began to mount. Unlimited liability was felt by some to create an insurmountable barrier to such expansion, inhibiting prospective deep-pocketed investors from putting their money into unlimited liability ventures. As Liberal MP William Clay said in 1836 “unlimited liability has a tendency to deter persons of fortune, intelligence and respectability from becoming partners or managers of joint-stock banks”.