Challenges of Effective Monetary Policy in Emerging Economies

  • Amartya Lahiri
  • Urjit R. Patel


Monetary policy making in emerging economies have their own particular challenges. The compulsions of unique institutional details as well as the thinness of financial markets in the backdrop of increasing global integration often tends to render the monetary transmission mechanism unstable. This paper first fleshes out a number of these confounding institutional and legacy issues in the context of India. We then illustrate the consequences of these frictions for the monetary transmission mechanism with two features of the policy environment in India: statutory liquidity ratio requirements imposed on banks and chronic fiscal deficits. We show that these frictions can completely invert the monetary transmission mechanism: when the constraint binds, a reduction in the policy rate can end up raising lending spreads and thereby cause a contraction instead of an expansion in the economy.


Interest Rate Monetary Policy Central Bank Government Bond Money Growth 
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Copyright information

© Springer India 2016

Authors and Affiliations

  1. 1.Vancouver School of EconomicsUniversity of British ColumbiaVancouverCanada
  2. 2.Reserve Bank of IndiaMumbaiIndia

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