PROJECT-EFFECT OF MONETARY POLICY ON

BUSINESS ENVIRONMENT
IMF WORKING PAPER ON MONETARY POLICY
COORDINATION AND THE ROLE OF CENTRAL BANKS
Submitted by
Ashrav Gupta (11108009)
Summary-Conventional wisdom suggests that the central banks
should control inflation in their respective economies through
short term instruments but the economic crisis of 2008 led to a
departure from this with the advanced economies or so called
developed countries like the US following various rounds of
quantitative easing through asset buying and thus increasing the
liquidity in their respective market leading to inflationary
pressures. The unconventional monetary policies pursued by the
advanced economies have posed macroeconomic challenges for
the emerging market economies like India through volatile capital
flows and exchange rates. These have caused the appreciation
and depreciation of currency of emerging markets based on
cycles of quantitative easing and tapering respectively highly.
Statements made by the our RBI governor recently also have
expressed caution in lowering the interest rates to accommodate
for the quantitative tapering programme of the US Federal
Reserve which may take place soon based on recent headlines.
The paper in this regard looks at the need for advanced
economies central banks to acknowledge and appreciate the
spillovers resulting from such unconventional monetary policies.
Central banks of the advanced economies, who have set up
standing mutual swap facilities, should explore similar
arrangements with other significant emerging market economies
with appropriate risk mitigation measures. These initiatives could

do much to actually curb volatility in global financial markets and

hence in capital flows to emerging market economies thus
obviating the need for defensive policy actions on the part of
emerging market economies.