Fiscal dominance can invert transmission mechanism, Lahiri and Patel find
Rate cut may prove contractionary under some institutional designs
Institutional design can twist the monetary transmission mechanism so strongly that policy rate moves end up having the opposite effect to what is expected, according to a working paper published by the Reserve Bank of India (RBI) on February 12.
Authors Amartya Lahiri and Urjit Patel take India as their example, showing by way of a simple model that forcing banks to hold a set amount of government bonds, as India does, can cause lending rates to rise when the policy rate is cut. When they add
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