Study analyzes impact of informality in labor markets on inflation stabilization and monetary policy offering new insights on MPT.
About Monetary Policy (MP)
- MP is a set of actions available to a nation's central bank (RBI in India) to achieve sustainable economic growth & Maintaining price stability by adjusting money supply.
- Statutory Basis: RBI, Act,1934 (amended in 2016).
- MP Framework: Central Government, in consultation with RBI, determines inflation target in terms of Consumer Price Index (CPI) every 5 years.
- Flexible Inflation Targeting: Currently, it is 4% (with a tolerance of +/- 2%) till March, 2026.
- Tools: Direct and indirect instruments like Repo Rate, Reverse Repo Rate etc.
- Types: Expansionary (Lowering interest rate to stimulate economic activity); and Contractionary (Increasing interest rate to slow down activity and prevent inflation)
Key findings of Study
- MP Transmission: Improves with more formality in the labor market.
- Impact on Unemployment: Contractionary Monetary Policy (CMP) leads to Rise in unemployment in both formal and informal markets.
- Impact on Macroeconomic variables: Contractionary Monetary Policy (CMP) leads to a decline in aggregate consumption, inflation, investment, output, capital stock, etc.
Monetary Policy Committee (MPC)
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