Abstract
To test the existence of impossibility trinity constraint in the Indian context, we build three impossible trinity indices, viz., capital account openness, monetary independence and exchange rate stability using data for the period 1991-2018. We find the evidence on the existence of the trilemma where the constraint increases with rise in capital account openness. We also find that monetary independence comes at the cost of exchange rate stability. Our results on the implications of movements in trilemma in the presence of international reserves on inflation suggest that exchange rate stability has been effective in reducing inflation in India and remains a dominant policy choice. A rise in the flows of international reserves, however, could increase inflation, albeit the effect is negligible, reflecting inadequate sterilisation operations by the central bank.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
