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Showing posts with the label inflation targeting

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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A Note on Monetary Polcy

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  The aggregate demand is defined by the identity Y=C+I+G+(X-M). Implied is the aggregate demand is the sum of consumption, investment, government expenditure and net exports. If the government intends to create a trajectory for the AD, it can alter one or more than one of these variables to meet its intended policy objectives. The government itself is autonomous player and thus can influence the economy through increased or decreased government spending G. Indirectly, the government can influence the spending through two different instruments, the fiscal and the monetary policy. The fiscal policy apart from the changes in government expenditure would also comprise of changes in tax rates. The government can increase or decrease tax rates thus influencing consumption, investment and net exports. The second instrument, the government employs is the monetary policy. It is through the instrument of interest rates, the government seeks to control the money supply and thus influence aggrega
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