Book Description

It is a stylised fact in the fields of economic growth theory and economic history that innovation is the engine of economic growth. Like the technological innovations, innovations in the financial sector are expected to change all aspects of economic activity, bringing about a greater improvement in economic performance. Rapid financial innovation as a phenomenon in the past decades has changed the array of financial services available to customers, but at the same time, complicated the environment in which Reserve Bank implements its policies. This paper tries to explore the specific impact of financial innovation on the monetary transmission mechanism, and hence the capacity of Reserve Bank to stabilise the economy and promote long-term economic growth. It is an important feature of monetary policy that it is not aimed at the financial system as such, but it uses the financial system as a means of achieving its objectives. Thus, financial innovation exerts effect on monetary policies. Financial innovation puts effect on the policies of Reserve Bank through interest rate, credit and exchange rate channels. And, the analysis drawing on recent financial crisis concludes that the impact of financial innovation on policies of Reserve Bank is only temporary.