Examining the trade-off between price and financial stability in India
Publication dateJan, 2019
DetailsNIPFP Working Paper No. 248
AuthorsIla Patnaik, Shalini Mittal, Radhika Pandey
In recent years, many emerging economies including India have adopted inflation targeting framework. Post the global fnancial crisis, there is a growing debate on whether monetary policy should target financial stability. Using India as a case study, we present an empirical approach to assess whether monetary policy can target financial stability. This is done by examining the trade-off between price and financial stability for India. Using correlation between price and financial cycles, we find that a trade-off exists between price and financial stability. Our finding is robust to a series of robustness checks. Our study has implications for the conduct of monetary policy in emerging economies. Presence of a trade-off may constrain the ability of a central bank in emerging economies to target financial stability with monetary policy instrument.