This article considers two aspects in the Reserve Bank of India’s (RBI) first set of reports on financial stability. First, the reports fear sudden and large flows of foreign capital, and rightly so. However, the focus of policy makers has been on foreign exchange reserves and on capital...

This article compares four regulatory regimes. First, commercial banks use ‘standard deposits’. Second, commercial banks use ‘standard deposits’ and may use the lender of last resort facility. Third, commercial banks use partial suspension of convertibility. Fourth,...

India has large twin deficits, high prices of some real assets, and (less familiar) fragile financial interdependence between banks and the government. So there is a systemic risk. However, India has a reasonably good record so far with regard to avoiding financial crises. This is due to five...

This paper makes four points. First, it introduces a new ‘academic’ concept—optimal noise in financial markets. Second, it suggests that the government intervenes to take care of the problem of ‘free ride’ in financial markets. Third, it suggests regulation of...

Simple but serious books have an important role to play. So Krugman’s book on ‘depression’ is very welcome. The emphasis of this book is on unemployment (and distribution more generally, including high compensation for finance ‘experts’). The analysis is...

There is a widespread view that inflation or inflationary expectations are the only way to overcome the zero lower bound on interest rate. This article shows that this is not true. It is shown that a tax-subsidy scheme can be used to overcome the zero lower bound on interest rate—without...

In our model, there are entrepreneurs and other agents. The latter have labour and capital, but no entrepreneurship. They are employed for a wage, or they are self-employed (which is inefficient). If they are employed for a wage, they invest their capital in financial assets. Otherwise, they...

Purpose – The purpose of the paper is to improve policy, and also to simplify theory and policy. Design/methodology/approach – Theory is used in a simple and yet powerful way. Stylized facts are used. This paper reconsiders the prevailing macroeconomic policy regime, and proposes an...