Monetary Policy, Financial Stability

O O H 1 O

NARENDRA JADHAV

MACMILLAN
 Preface v
1. Macroeconomic Thinking 1
1.1 Classical Economics 1
1.2 Keynesian Revolution and Neo-classical Synthesis 2
1.3 Monetarism 5
1.4 Rational Expectations Revolution and New Classical Economics 6
1.5 Contemporary Paradigms 8
1.6 Summing Up 16
2. Money Matters 18
2.1 Money: Concepts and Measures 18
2.2 Demand for Money 25
2.3 Money Supply Process 37
2.4 Velocity of Money 47
Annexure 2.1 51
3. Finance Fundamentals 53
3.1 Role of Finance in an Economy 53
3.2 Financial Instruments, Markets and Institutions 56
3.3 Valuation of Financial Assets 62
3.4 Term Structure of Interest Rates and Yields Curves 67
3.5 Risks 76
3.6 Stock Markets and Market Efficiency 82
4. Monetary Theory: Evolution and Contemporary Paradigms 86
4.1 Classical Monetary Economics 86
4.2 Keynesian Monetary Economics 87
4.3 Monetarism vs Keynesianism 89
4.4 New Classical View of Monetary Economics 92
4.5 Contemporary Strands in Monetary Theory 95
4.6 Summing Up 99
5. Financial Globalisation and the Impossible Trinity 101
5.1 Analytical Framework for an Open Economy: IS-LM-BP Model 101
5.2 Comparative Statics with the IS-LM-BP Model 105
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5.3 Aggregate Demand and Aggregate Supply 108

5.4 The Impossible Trinity 110
5.5 Policy Implications of the Impossible Trinity 113
6. Leading Issues in Monetary Policy Formulation 116
6.1 Objectives 117
6.2 Intermediate Targets 123
6.3 Operating Procedures 129
6.4 Monetary Policy Transmission 135
7. Framework for Financial Stability 142
7.1 Anatomy of Financial Crises 142
7.2 Defining Financial Stability 143
7.3 Sources of Financial Instability 146
7.4 Regulation of Financial Institutions 152
7.5 Regulation of Financial Markets 159
7.6 Regulation of Financial Market Infrastructure 161
7.7 Monetary Policy and Financial Stability 163
7.8 Concluding Remarks 164
8. Leading Issues in Central Banking 166
8.1 Evolution of Central Banking 166
8.2 Central Bank Balance Sheets 168
8.3 Central Banks and Monetary Policy 175
8.4 Central Banks and Financial Stability 183
8.5 Central Bank Autonomy 191
8.6 Concluding Remarks 193
9. Conduct of Monetary Policy in India 194
9.1 Objectives 194
9.2 Intermediate Targets 200
9.3 Operating Procedures 207
9.4 Monetary Transmission Mechanism in India 218
9.5 Term Structure and Interest Rates • 225
9.6 Communications Policy 228
10. Financial Stability in India 230
10.1 Macroeconomic Policy and Financial Stability 231
10.2 Banking Supervision 233
10.3 External Sector Management 236
10.4 Payment and Settlement System 239
10.5 Central Bank Autonomy 243
11. Central Banking in India 248
11.1 Evolution of the Reserve Bank of India 248
11.2 RBI's Balance Sheet: Structure and Dynamics 255
11.3 The RBI's Balance Sheet and the Macroeconomy 268
11.4 Some Emerging Issues 283
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12. Liberalising India's Financial Sector: Constraints, Challenges and Prospects 287
12.1 Pre-Reform Financial System in India and Rationale for Reforms 287
12.2 Salient Features of the Reform 289
12.3 Critical Aspects of Financial Sector Liberalisation in India 290
12.4 Performance of the Financial Sector 292
12.5 Indian Financial Sector in the Global Context 294
12.6 Challenges Ahead 296
13. Evolution of Financial Markets in India 303
13.1 Evolution of Financial Markets in India 303
13.2 Money Market 303
13.3 Government Securities Market 318
13.4 Foreign Exchange Market 322
13.5 Capital Markets 327
13.6 Assessment and Way Forward 332
14. Macroeconometric Modelling for Policymaking: Retrospect and Prospect 335
14.1 Macroeconometric Models in India 336
14.2 Analytical Assessment of the Macroeconometric Models in India 346
Annexure 14.1 350
References 355
Index 387