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Showing posts with the label monetary policy

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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Crypto Currencies and Sovereign Challenges

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  There is a n interesting article on crypto currencies authored by V Ananta Nageswaran (VAN) in the Mint. The article is available here . It seeks to locate the rise of privately circulated crypto currencies, the government reactions and probable challenges of sovereignty. Crypto currencies are seemingly once again the flavour the season. Elon Musk has announced Tesla would accept Bitcoin as a medium of exchange. There are banks in the US which are in the process of accepting custodianship of crypto currencies. Crypto currencies are privately circulated, highly volatile and do not have the backing of the government. Instead many governments including India are contemplating banning privately circulated crypto currencies like Bitcoin. There are others who view the crypto currencies through the prism of speculative instruments thus a potential lead indicator of the emergent bubble.   The author locates the suspicion of the sovereign to the anonymity provided by the crypto currencies
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Demand and Supply of Money: A Primer

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  The execution of monetary policy as an instrument to direct the economy to the needed trajectory is essentially dependent on people’s willingness to use those instruments. As observed in the previous posts, the monetary policy is an indirect attempt to induce an increase or decrease in consumption or investment to the required rate using the cost of money, the interest rates as the guiding principle. By increasing or decreasing the interest rates, the objective would be to keep money supply stable while encouraging or discouraging economic agents to indulge in consumption or investment. Therefore, the context provides the backdrop for understanding money supply and the demand for money thus the foundation of monetary framework. The current note will delve deeper into these aspects.   The understanding would begin with the functions of money. Money has three key functions viz, the unit of account, the store of value and medium of exchange. The inability to perform the first two ro
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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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Consumption-Investment Dynamics and the Budget

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  The Union Budget for the financial year 2021-22 is to be presented to Parliament in less than a month from now. The focus would be on the stimulus the government would give to different sectors as they seek to recover from the lockdown induced by the Chinese pandemic. The focus of the government in 2020 would have to be ensure the firms and households remain solvent during the pandemic lockdown but as the vaccinations are underway, there would be direction necessitated for revival of the economy. The economy must shed the past and look towards the future. An important indicator would be however the boost to the consumption. The economic revival in India has to pick either through a growth in consumption or growth in investment. The government expenditure has ensured the economy remains stable in turbulent times and has saved further blushes for the economy. it is time to revive the other components of aggregate demand.   Investment is sought to be increased through Atmanirbhar pr
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Macroeconomic Scenario in India: A Note

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  The year 2020 is about to end and perhaps looking back it would be a year that would be best forgotten for all the things. The Chinese virus induced pandemic does not seem to subside with new mutations being reported and countries going into lockdowns ahead of Christmas. This is despite the vaccines are getting administered albeit the baby steps in combating this disease. While experts do believe the end game for the pandemic has begun, one has to await for some more time before any concrete results are likely to be visible. As one looks forward to 2021, at this stage it seems the economic recovery is still some way off across the world. There would be a new President in the United States and it must remain to be seen how President Joseph Biden would deal with China, the country primarily responsible for the current global crisis, social, economic and health.   The macroeconomic projections for India have been less worse than anticipated. The second quarter of the financial year
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Is the Monetary Policy Dead?

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  The recent monetary policy announcement by the RBI governor was not surprising in terms of its actions. It has chosen to retain the key ratios as they are. Further, they have indicated the possibility of a continuing negative growth of the GDP in the remainder part of the financial year. The inflation is relatively higher in CPI terms but low in terms of WPI. Foreign direct investment continues to increase with India currently having the largest quantum of foreign exchange reserves in its history. It would however be pertinent to understand the dynamics of monetary policy at this stage.   Monetary policy as noted in earlier posts too, is rooted in stimulating demand and supply through changes in the price of money, the interest rates. Either the policy can point towards interest rate stability which implies continued changes in money supply. Alternatively, if the focus is on stable money supply, interest rates have to keep on changing to achieve the desired money supply target. I
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RBI, Onions and Monetary Policy

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The outcome of RBI’s sixth and final bimonthly monetary policy statement for the FY 2019-20 is unsurprising. Repo has been retained at 5.15% and therefore the other rates like MSF, reverse repo, bank rate etc. too remain unchanged. RBI projects a growth of 6% something in alignment with what the budget has projected. They anticipate higher uncertainty in inflation. The question however, is given the macroeconomic dynamics at the current instant, could RBI stance been bolder or was it cautious reiteration of its mandate. As one delves in to the RBI monetary policy statement (available here ) some interesting pointers emerge. Global headwinds continue to impact the Indian economy too. There is no respite for European economies like France and Italy on the continued downward growth trend. Britain will have to confront with post Brexit uncertainties. US Iran tensions may have eased down momentarily but the impact might take a time to ease out, US-China trade wars demonstrate ebbs an
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