View: Monetary policy is best crafted with analytical clarity, not muscular nationalism or simple binaries
Central banks play a central role in monetary policymaking and a key operational role in current account management. In countries like India, with capital controls and a structural current account deficit (CAD), these roles elide.
The task involves careful policy calibration and skilful deployment of a wide set of tools available for current account management, importantly exchange rate management, but also credit, trade and investment policy. This, therefore, requires a 'whole-of-government' strategy with clearly defined macroeconomic objectives.
Much commentary on exchange rate policy is simplistic and polarised. At one extreme, we have those who believe in a 'strong' exchange rate, as evidence of a nation's economic testosterone. While this view is normally weird enough to be dismissed as absurd, it gains credibility because the view from the other extreme-the 'mainstream' of the economics profession-is equally doctrinaire and simplistic.
The prescription is to let the exchange rate float and free all capital controls. This is based on a world created for economic textbooks to justify such simplistic free market propositions. In the actual world, currency and money markets are imperfect, asymmetric and reflect the geopolitical balance of power. Why else is the dollar the global reserve currency?
There is also the conveniently ignored fact that the Marshall Lerner conditions-which support floating exchange rates securing current account balanced by stipulating that devaluations make exports cheaper and imports
