Title: Capital controls, exchange rate regime and monetary policy independence in India

Authors: Amit Ghosh; Ramya Ghosh

Addresses: Department of Economics, Illinois Wesleyan University, 1312 Park Street, P.O. Box 2900, Bloomington, IL 61702-2900, USA ' Department of Economics, Centre for Graduate Studies, LeBow College of Business, Drexel University, One Capitol Mall, Suite 260, Sacramento, CA 95814, USA

Abstract: An enduring challenge that policy makers in open economies confront is the choice between three desirable, yet jointly unattainable objectives of maintaining a fixed exchange rate regime, free international capital flows and monetary policy independence. This paper examines these three tenets of the 'policy trilemma' for India over its post liberalisation period. We first construct a new measure of capital controls, documenting an easing of restrictions on capital flows over time. Next, we find the de facto evolution of India's exchange rate regime to move towards a greater degree of flexibility with declining weights attached to the US dollar. Finally, we reveal India to preserve her monetary policy sovereignty over the post-liberalisation period with a slight increase in such independence after the turn of the millennium. We note the findings of this study to be in line with the predictions of the trilemma.

Keywords: exchange rate regimes; capital controls; monetary policy independence; policy trilemma; emerging economies; India; capital flows.

DOI: 10.1504/IJEPEE.2012.051362

International Journal of Economic Policy in Emerging Economies, 2012 Vol.5 No.3, pp.212 - 230

Received: 07 May 2012
Accepted: 27 Aug 2012
Published online: 15 Nov 2014 *

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