Abstract:-

The central bank faces a trade-off while using its interest rate policy for the purpose of macroeconomic stability. So, the policy is not very effective. Also, the prevailing interest rate policy can adversely affect (the non-affluent) recipients of interest incomes. It can also affect asset price stability, which can, in turn, affect banking stability (this happened recently in the US). So, the policy is blunt. Is it possible to have an alternative interest rate policy that is effective and well-targeted? Yes. The author addresses, in a novel way, the basic issue of the paucity of policy tools, which is at the heart of the prevailing policy regime.