Chandrasekhar Hall

Inflationary effects of monetary policies in newly industrialized economies

Anindya S. Chakrabarti

Economics area, Indian Institute of Management, Ahmedabad

The recent experiment on demonetization raised questions about how absence of liquid assets impacted different parts of the Indian economy. This talk will discuss the effects of monetary policies in newly industrialized economies characterized by extremely low level of labor and capital mobility between urban and rural sectors. Policies are executed in the urban sector which sends waves of adjustments in the rest of the economy. I will show that with liquidity constraints and immobility in labor and capital, the sector-specific effects are markedly different from those in a one-sector economy. In particular, they are asymmetric and the rural sector lags behind the urban sector during adjustment process. This explains temporary phases of significantly high inflation with uneven sectoral effects which often accompany major reforms in the banking and monetary institutions of such economies, e.g., in case of India. Finally, as consumption patterns alter in such an economy undergoing structural changes, the sectoral distribution of liquidity is affected inducing dissimilar responses to shocks, both within and between sectors.