Assistant Professor, Department of Management Studies, Deen Dayal Upadhyaya College, University of Delhi, New Delhi, India. yogieta@gmail.com
Online published on 12 May, 2017.
The broad objective of the study is to establish the effectiveness of monetary policy as a tool for combating inflation in developed and developing economies. The paper investigates the role of variables like inflation level, interest rates, policy rates, open market operation rate and the foreign exchange rate (measurable in dollars) of three economies-India, China and USA to study the mechanism.
Monetary Policy of any country is designed to meet the primary objectives of achieving good growth levels along with Price stability. These two goals lie in contradiction to each other since an expansionary monetary policy tends to increase the growth rate but at the same time compromises on Price stability. While the monetary authority faces a choice between the two, most of the times, it favours price stability to growth. Authorities try to achieve price stability by restricting money supply or by increasing interest rates.
The study observes that (i) The three countries under study viz., India, China and USA display different characteristics and a particular monetary policy tool is not effective across all three countries (ii) Indirect tools to control inflation are used by countries as they move up the development ladder (iii) Exchange rate is an effective tool for Indian economy to control inflation.
