MONETARY POLICY IN INDIAN AND U.S.: IS THE TAYLOR RULE IRRELEVANT?
Prof. Bansi Sawhney, Prof. Kishore G. Kulkarni, Prof Nicolas Cachanosky
The present paper is about the monetary policy mechanism and transmission process as it relates to the economies of India and the U.S. While a vast amount of literature exists on monetary policy transmission mechanism in developed capitalistic countries, no distinct treatment is available for developing countries such as India. There are obvious limitations for monetary theory applied to countries such as India compared to a developed country such as the U.S. Most well-known amongst these limitations, is the dilemma embarked by the dichotomy of monetary versus non-monetary sectors of the Indian economy. The rural sector of the Indian economy, where majority of the population lives, is still dominated by private money lenders and by several other crude financial institutions. This financially under-privileged sector persists along with the financially well-developed urban sector where online transactions are common and almost all modern financing facilities are available. The case for “rule versus discretion” merits renewed discussion in monetary policy making both in India and the U.S. The paper argues that there is no deliberate or implicit application of any rule, such as the Taylor rule in India. In the U.S. the Federal Reserve in 1990 to 2001 period has supposedly followed the Taylor Rule. However, since the financial crisis of 2008, there has been no change in the discount rate and the focus is more on the quantitative easing (QE). The Taylor rule is not only out of fashion but also has become irrelevant. This paper attempts to show that the Taylor rule does not help in explaining contemporary monetary policy behavior in either country.
Keywords: Monetary Policy; India and the U.S.; the Taylor rule.