Monetary policy framework as its name suggests, refers to the mechanism of monetary policy design and its execution. According to McNees (1987, p.3), a monetary policy framework comprises “the institutional arrangements under which monetary policy decisions are made and executed.” The monetary policy framework involves:
The way how the RBI identifies a monetary policy intervention problem, so that a response is needed,
Institutional mechanism (Monetary Policy Committee, RBI’s explanation to the Government regarding monetary policy target realization) for monetary policy implementation.
The selection of monetary policy instruments on tackling the problem,
The relationship between monetary policy instrument and the target or in other words, the assumed working of the instrument to influence the target.
In India, the RBI follows inflation targeting monetary policy framework from August 2016 onwards.
