Under this approach, besides monetary aggregates, a host of forward looking indicators such as credit, output, inflation, trade, capital flows, exchange rate, returns in different markets and fiscal performance constituted the basis of information set used for monetary policy formulation. The enactment of the Fiscal Responsibility and Budget Management (FRBM) Act in 2003, by introducing fiscal discipline, provided flexibility to monetary policy.
It may be, for example, that potential output has fallen by virtue of the panic and its aftermath. If the resulting economy proves less adaptive, for example, the natural rate of unemployment may well threaten to move upward, implying tighter labor markets at higher unemployment rates, and lower potential output.