An important objective of a monetary policy exercise is to ensure stable growth in the economy. Alongside monetary policy, fiscal policy stimulus should also support growth activities. Increased ‘risks’ arising out of monetary instability, exchange rate fluctuations, variations in the rates of economic growth, the choice of the right sectors within the economy to act as ‘triggers’ to growth, distortions in international trade pattern and all such factors add to the complexities of charting the right ‘prescription’ in terms of a monetary policy.

The paper, “Relationship Between Budget Deficit and Trade Deficit: A Case Study of Pakistan Economy”, by Qazi Muhammad Adnan Hye and Asghar Ali, provides a perception in understanding the requirement to ensure compatibility between monetary policy and fiscal policy.

In this process, concern for stability of money demand is important in view of the fact that any possible uncertainty, say, in the form of inflation, would get reflected in the corresponding private investment levels in the economy. This aspect is highlighted in the paper, “The Effect of Uncertainty in Inflation Expectations on Private Investment”, by Yaron Zelekha.

ndustrial sector and other sectors within the economy need to ‘enjoy’ a proper allocation of funds while participating in the process of economic growth. Hence, policy makers need to establish the certainty of demand for money in an economy before deciding on the appropriate policy response. The paper, “Stability of Demand for Money Function by Business Firms in India”, Sherry Bawa and Gian Kaur, helps us to test this need.

Apart from the increasing levels of globalization, rapid changes in technology that facilitate better performance of both production and services sectors create the necessity to import higher levels of technology from abroad. However, the effectiveness of different sectors in propelling industrial growth could be best ascertained only by analyzing the exchange rate implications of transactions relating to international business. The paper, “The Economic Exchange Rate Exposure: Evidence for a Small Open Economy”, by Abdul Rashid, helps us to probe this view further.

While different sectors act as ‘triggers’ of growth at different points of time, the potential of housing sector in creating monetary policy distortions has attracted the attention of researchers in recent times. In this context, the paper, “Financial Liberalization and the Effectiveness of Monetary Policy on House Prices in South Africa”, by Ndahiriwe Kasai and Rangan Gupta, helps us to rework the linkages between monetary policy and house prices.

Finally the paper, “Evidence on PPP from Middle Income Countries in the Nonlinear STAR Framework”, by Shabbir Ahmad, reveals the demand aspect of money arising out of the purchasing power in both domestic and international markets by analyzing the existence of multi-country purchasing power parity.

Monetary policy makers need to be wary of the changes in affluence levels in developing countries amidst expectations that both India and China could emerge as not just leading ‘production centers’, but as leading ‘marketing centers’ as well.

-- Y G Sivaram
Consulting Editor