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The supply-side effect of a restrictive monetary policy is likely to be perverse, in that high interest rates enter into costs and thus exert inflationary pressure.
Any debate among politicians about monetary policy is counterproductive.
Monetary policy itself cannot sensibly be directed at reducing imbalances.
Monetary policy has less room to maneuver when interest rates are close to zero, while expansionary fiscal policy is likely both more effective and less costly in terms of increased debt burden when interest rates are pinned at low levels.
To pump up consumer or government demand would force interest rates up and asset prices down, possibly by enough to destroy more jobs than are created.
We have one of the highest interest rates in the world, and we owe more money per capita than any other country. All we need is a nail hole in the bottom of the boat and we're sunk.
However, in spite of the general perception that monetary policy should be conducted so as to avert deflation, a central bank cannot lower interest rates below the zero lower bound.
Demonetisation is a disinflationary process. So, this will bring down prices in the long run. It will also help in bringing down interest rates.
Many emerging countries are facing the same issue of overheating and inflation because they have been vigorously expanding fiscal and monetary policy to counter the 2008 shock.
