Macroeconomic policy and the exchange rate: working together?

The chapter reviews the behaviour of the Indian exchange rate over the past few years, and its interactions with the macroeconomic cycle. It examines the extent to which exchange rate policy has been able to contribute to lowering the probability of currency and banking crises, ensuring sustainable internal and external balance, and containing inflation. Given the political economy, more openness, the structural wage-price processes, the degree of backward and forward looking behavior in the Indian economy, the chapter draws out implications for macroeconomic policy. It finds that structure combined with openness actually increases the degrees of freedom and impact of monetary policy