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Showing posts with the label core inflation

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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Reviewing Inflation Targeting

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  In 2016, India officially adopted inflation targeting as the objective of the monetary policy. With five years elapsed since the Urijit Patel committee submitted its report and later adopted, the Reserve Bank of India (RBI) is all set to review the policy. The committee headed by Urijit Patel had suggested 4% as the targeted inflation with of course a permitted band of plus or minus two percent. In other words, the RBI policy would have to ensure the inflation remains within the range of 2-6%. The repo rate was made the benchmark interest rate around which the RBI stance would revolve. Based on the data and evidence, it was believed that 1.25% would be the ideal real repo rate. In other words, at this real repo rate, the economy grow at a level it would have grown if there was full employment. This was something akin to what Philips Curve would have projected around. The four percent inflation mark was perhaps viewed in the Philips Curve terminology as non-accelerating   inflation ra
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Notes on Inflation

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  Inflation is a continuous increase in the general price level. It measures the changes in the price level in the economy. If the firms desire a stability in price, the price levels must remain stable. Therefore, an eye on inflation figures is no doubt important for any manager or an entrepreneur. For the inflation to be measured, there must be a construction of general price level. Generally, there are two measures that are constructed for general price level. Going back to the circular flow model, there are two actors, the firms and the households in the economy. Firms produce goods and services which the households consume. The firms sell goods at certain prices and the households consume the goods at certain other prices. There is a difference between the prices at which the firms sell and the prices at which the households consume. Therefore it becomes important to know which prices have to be taken for constructing a general price level. In all cases, price levels are constructe
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Solving the Food Inflation Puzzle

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The double digit food inflation shows no signs of abatement. Meanwhile, the headline CPI (7.35%) hits the highest point in recent years.   However, the core CPI has stagnated around 3.6%, WPI continues to be low and core WPI is in near zero zone. There is negative inflation in manufacturing sector as also in fuel and power. GDP deflator is less than 2%. In normal course, low real growth will translate into low nominal growth depressing the economic buoyancy. Therefore, barring food inflation, other components are well under control, yet unless food inflation is tamed, political costs are like to be substantial.   There are grounds to suggest the causes to usual inter seasonal volatility, but that would be short-sighted.   There exists an opportunity in the crisis long term solutions to agricultural production. In endeavouring a solution, there however lies a catch. Agriculture is state subject thus resulting in each state adopting a different approach. Further, farmers constitut
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