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

a post - world war ii australia, when ensuring economic stability and high levels of employment were very much top of mind. establishing such a broad mandate for the central bank ran against the conventional wisdom of the time, which was that central banking was about just currency and banking. indeed, in his book on the history of the reserve bank, boris schedvin was moved to write : ‘ this bold declaration of responsibility was a landmark in the history of central banking. ’ it was a landmark in the sense that the australian parliament recognised that central banking was not only about money and finance, but it was also about jobs and the welfare of our society. as the current governor of the reserve bank of australia, i very much share this perspective. ultimately, central banking is not only about finance and money ; rather, it is about enhancing the economic welfare of the people we serve, primarily through achieving price and financial stability and maximum sustainable employment. melville had an important hand in setting this direction. his contribution goes back to at least 1936, when he made a lengthy submission to the royal commission on the monetary and banking systems in australia. the first sentence of that submission reads : ‘ the ultimate purpose of monetary policy is to enable the economic system to achieve the optimum use of available resources as far as this is possible ’. [ 4 ] it was then 23 years later that this idea – in different words – found expression in the reserve bank act 1959. it is worth recalling that melville had less success in his quest for full employment to be incorporated into the charters of global economic institutions that were set up after world war ii, including the international monetary fund. this was not for want of trying – at all the major international economic conferences at the end of the war, he was a strong advocate for what became known as the ‘ full employment approach ’. but back to the world of central banking. since the early 1990s, the conventional wisdom has been that the best contribution a central bank can make to full employment and economic welfare is to maintain low and stable inflation. this is because by keeping inflation under control and within a narrow range, the central bank can https : / / www. rba. gov. au / speeches / 2019 / sp - gov - 2019 - 10 - 29. html 2 / 18 10 / 30 / 2019 some echoes of melville | speeches | rba reduce uncertainty and economic distortions and, in so doing, provide a stable foundation for people to make decisions about savings and investment. in turn