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Policy Trilemma in India: Exchange Rate Stability, Independent Monetary Policy and Capital Account Openness

Author

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  • Sayantan Bandhu Majumder

    (Department of Economics, Sambhunath College, Birbhum, Labpur, West Bengal 731303, India)

  • Ranjanendra Narayan Nag

    (Department of Economics, St. Xavier’s College, Kolkata, West Bengal, India)

Abstract

This paper aims to investigate the situation of policy trilemma in India. Analysing the quarterly data from 1991 to 2015, we find that though the trilemma constraint is binding in the long run, there is ample evidence of short-run deviations from the constraint. Intervention in the foreign exchange market by the Reserve bank of India has successfully helped to relax this constraint. The policy mix has changed over this period – the degree of capital account openness has gradually increased, mainly at the cost of exchange rate stability. We further examine the determinants and the macroeconomic effects of the trilemma policy configuration. We find that the trilemma efficiency depends on the financial stress, financial development, intervention by the Central bank and the liquidity in the economy. Higher monetary policy independence helps to reduce the inflation rate while exchange rate stability and capital account openness are associated with the higher growth rate and the larger output gap.

Suggested Citation

  • Sayantan Bandhu Majumder & Ranjanendra Narayan Nag, 2017. "Policy Trilemma in India: Exchange Rate Stability, Independent Monetary Policy and Capital Account Openness," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 17(3), pages 1-13, September.
    • Handle: RePEc:wsi:gejxxx:v:17:y:2017:i:03:n:gej-2017-0012
    DOI: 10.1142/GEJ-2017-0012
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    Cited by:

    1. Padhan, Hemachandra & Sahu, Santosh Kumar & Dash, Umakant, 2021. "Non-linear analysis of international reserve, trade and trilemma in India," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).
    2. Gabriel Caldas Montes & Irineu da Silva Rodrigues Júnior & Júlio Cesar Albuquerque Bastos & Linican Monteiro Batista, 2024. "Effects of monetary policy credibility and the open economy trilemma on monetary policy efficiency," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1236-1258, April.
    3. Bonga-Bonga, Lumengo, 2024. "Assessing the impossible trinity principle in BRICS grouping," MPRA Paper 121839, University Library of Munich, Germany.
    4. Ramandeep Kaur, 2019. "Sensitivity of Macroeconomic Policy Goals to Trilemma and Quadrelimma Choices," Asian Development Policy Review, Asian Economic and Social Society, vol. 7(4), pages 219-238, December.

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