duvvuri subbarao : a revolution in monetary policy welcome remarks by dr duvvuri subbarao, governor 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. * * * 1. on behalf of the reserve bank of india, i have great pleasure in welcoming prof. joseph e. stiglitz, who will shortly be delivering the c. d. deshmukh memorial lecture. also, a warm welcome to mrs. anya stiglitz who has accompanied him. i am delighted to acknowledge the presence here of the family members of sir chintaman deshmukh – shri atul deshmukh, smt. sheetala deshmukh, and their children, ashish and priyanka, prof. sunita chitnis and her son dr. ajay chitnis. your presence here means a lot to us. finally, and importantly, a warm welcome to all our invitees to this prestigious lecture. c. d. deshmukh 2. sir chintaman d. deshmukh has a special place in the history of the reserve bank. he was the first indian governor of the reserve bank, and served the institution with great distinction and dignity from august 1943 to june 1949. he presided over the transformation of the reserve bank from a private shareholders ’ bank to a nationalised institution and was the intellectual force behind the enactment of a comprehensive legislation for the regulation of banking companies which has stood the test of time. governor deshmukh participated actively in the establishment of the bretton woods institutions in 1945 and played a critical role in managing india ’ s nascent economy as we confronted the challenges of war financing following the second world war. 3. after leaving the reserve bank, shri deshmukh went on to become the finance minister of india, a career graph repeated by our current prime minister, dr. manmohan singh nearly forty years later. shri deshmukh brought to the office of the finance minister a passion for newly independent india ’ s development and a humane and inclusive vision for nation building. by all accounts, sir chintaman deshmukh was one of the finest public policy intellectuals of post - independence india. 4. the reserve bank instituted the c. d. deshm

the process, is willing to tolerate inflation slightly above its long - run target. another way of reinforcing this promise of low interest rates is the idea of shifting from targeting inflation to targeting nominal gdp. bis central bankers ’ speeches financial stability 16. quantitative easing has not been the only issue in this monetary policy revolution. a parallel, if also related, debate has been about the role of financial stability in the monetary policy objective function. this has raised several questions. what is the role of central banks in preserving financial stability? when and how should they use monetary policy to pursue financial stability? if you admit the argument that one instrument can secure only one objective, do central banks have the policy instruments to pursue the financial stability objective? independence of central banks 17. a third major debate in monetary policy has been about the independence of central banks. in recent weeks, we have all seen this issue of central bank independence play out in japan with political pressures on the bank of japan to adopt a higher inflation target so as to create more room for growth stimulus. the example of japan is recent and high profile, but by no means an exception ; the issue of monetary policy independence has acquired greater potency following the expansion of the mandates of central banks and their more explicit pursuit of real sector targets such as growth and unemployment. emerging market economies and monetary policy revolution 18. revolution in monetary policy is not exclusive to advanced economy central banks. emerging market economy central banks are going through a revolution too with, of course, different nuancing. they have not been inflation targetters in the strict sense ; they have always struggled to maintain the balance between growth and price stability. and learning from the experience of several country specific and regional crises, they have also added, either explicitly or implicitly, financial stability to their objective functions. 19. monetary policy revolution in emerging market economy central banks has an additional dimension, which is that in formulating their monetary policy, they are having to contend with the forces of globalization, in particular the spillover impact of the advanced economy central banks. the “ impossible trinity ” asserts that a country cannot simultaneously maintain all three policy goals of free capital flows, a fixed exchange rate and independent monetary policy. recent experience in emerging market economies has demonstrated that the “ impossible trinity ” is no longer a text book paradigm ; balancing between these three policy goals is becoming a practical policy consideration. monetary and fiscal policies 20. even as monetary policy, both in advanced and emerging market economies. is going through a