Abstract
This paper explores the importance of central banking policies in financial market performance, using the case of India. For this purpose, the paper comparatively analyzes the performance of financial markets during the regimes of last three governors of the Reserve Bank of India—Y V Reddy, D Subbarao, and Raghuram Rajan. The paper discusses the central banking policies in these periods with respect to monetary stability, inflation, and growth challenges. The paper presents an analysis of returns and volatility in stock markets and currency markets in their tenures in comparison with those from other selected emerging markets (Brazil, Russia, China, South Africa) and developed markets (USA and UK). The paper also brings out the leverage effect by applying the exponential generalized autoregressive conditional heteroskedasticity (EGARCH) model in addition to comparatively analyzing the performance of financial markets. Further, the paper assesses the impact of central banking policies on financial markets by using the fixed effect model on the reference countries for the period under reference.
Highlights
Economic policies aim to attain the goals of high employment, stable prices, and rapid growth.The role of monetary policy—the main instrument with which a central bank governor can act—in helping attain these goals has been under discussion for a long time
Economies 2019, 7, 49 and immediate effect of changes in central bank policy is on financial markets (Jensen et al 1996; Thorbecke 1997; Chen 2007; Ioannidis and Kontonikas 2008)
This section of the paper looks into the performance of financial markets under the governorship of Y V Reddy, D Subbarao, and Raghuram Rajan in comparison with BRCS (Brazil, Russia, China, South Africa), USA, and UK
Summary
Economic policies aim to attain the goals of high employment, stable prices, and rapid growth. The role of monetary policy—the main instrument with which a central bank governor can act—in helping attain these goals has been under discussion for a long time. While lowering the policy rates may lead to increased money supply, resulting into speeding-up of economic growth, on the flip side, it may push inflation to higher levels. There is clearly a trade-off in the short term, though there may be no long-term trade-off between inflation and growth (Brash 1999).. The influence of central banking policy instruments on macroeconomic variables such as output, employment, and inflation is at best indirect, while broader financial markets , including the stock market, foreign exchange markets, and others, are quick to reflect new information.
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