Pros And Cons Of Inflation Targeting

835 Words2 Pages
bulb-icon

Recommended: Advantages and disadvantages of inflation targeting of the BSP

INFLATION TARGETTING IN INDIA: An ANALYSIS OF ITS FEASABLITY
Indian economy is passing through a critical phase with growth rates dropping to a sub 5% range. The predictions for future growth also don’t seem to be bright. The fiscal deficit is looming large ranging at a high 4-5 % of GDP threatening the economy. The retail inflation too is hovering in double digits for the last 24 months. So all in all, a low growth rate, a high fiscal deficit, a high inflation, a high CAD prompted the S&P to warn India of downgrading its investment status to JUNK. Now, inflation targeting seems to be the most suitable solution that will dole out India’s economy. The recent RBI expert committee report too suggested that India should adopt inflation targeting as its sole policy. With the committee’s recommendations almost getting accepted unofficially, India is on the verge of jumping into the bandwagon of the much touted Inflation Targeting Framework countries. This situation calls for a heated debate on the pros and cons of issue.
Inflation targeting (henceforth IT) as a monetary framework has been tested for over 2 decades by many nations across the world. Currently there are 34 nations officially adopting inflation targeting as their sole monetary policy. This includes 25 developing nations and 9 developed nations.
Now the crucial questions that needs serious discussions are
Is this the right time to undertake inflation targeting?
The prospects of inflation targeting in India has been subject to intellectual debate from the past 15 years. The Percy mistry committee (07), The Raghuram Rajan committee (08) also recommended the IT. But it was later on rejected citing absence of financial stability .however after adopting the BASE...

... middle of paper ...

...it shuns speculation,attracts FII’s which would boost investment and thus propels economic growth.

Methodology
As a social scientist we don’t have the advantage of a laboratory like condition where we can undertake experiments,our only hope is the historical data , which luckily is available aplenty in this case.the IT countries can be broadly classified into two groups the developed nation and the emerging market economies. A developed economy differs significantly from transitiobnal economies like india in a wide range of structural aspects such as financial institutions,monetary transmission mechanism,central bank independency,etc. This makes the comparision inconsequential.so ,i would like toemphasize on the cross national study with a focus on emerging market economies (EME) like the G20 countries which bear a signifivant resemblence to our economy.

Show More
Related

  • The U.S. Free-Enterprise Economy

    788 Words  | 2 Pages

    Monetary Policy is another policy used in Keynesianism which is a list of protocols designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system, also known as the central banking system in the U.S., which holds control of this policy. Monetary policy has three tools used by the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rate a bank will charge.

    Read More

  • The Pros And Uses Of The Federal Reserve

    703 Words  | 2 Pages

    The Federal Reserve or the FED is the central banking system in the United States. It was created in 1913 under president Wilson, with the purpose of controlling the stability of the financial system. The monetary policy is the course of action that the FED takes to ensure a stable economy in the United States.

    Read More

  • The Pros And Cons Of The Federal Reserve

    1246 Words  | 3 Pages

    The Federal Reserve (Fed) creates and manages some of the most important economics policies in the world. Its current chairman, Janet Yellen is considered one of the most powerful people in the world because of the decisions she over sees. One of the biggest decisions that Federal Reserve has to make is what to do with the short-term interest rate. To comprehend that question one must look in to the two factors that go in that decision. Those to factors are referred to as the dual mandate. So what exactly does the dual mandate entail of?

    Read More

  • How Are Automatic Stabilizers Used To Combat Inflation?

    393 Words  | 1 Pages

    not be as high above, or even above where the supply is, therefore reducing the

    Read More

  • Monetary Policy Rules Or Discretion

    808 Words  | 2 Pages

    Using the Rule approach in monetary policy infers that, “the policy instruments of the central bank would be set according to some simple and publicly announced formula, with little or no scope for modification or discretionary action on the part of policymakers” (Bernanke). Therefore, in the context of describing a rule, it’s merely a restriction that is placed in such a way that it limits the authorities discretion of monetary actions. The “K-Percent Rule”, a famous proposal by the most prominent advocate of using rules in monetary policy states, “the central bank would be charged with ensuring that some specified measure of the nation money supply increase by a fixed percentage each year, irrespective of broader economic conditions” (Bernanke). Although this rule never came into effect, it’s a great example to show a rule-based policy that would be put into place, which could not be altered by discre...

    Read More

  • Monetary Policy

    551 Words  | 2 Pages

    According to “Recent Monetary Policy and the Fiscal Theory of the Price Level” written by Bennett T. McCallum on March 12, 2014 for Camegie Mellon University, McCallum agrees with the idea that monetary policy can curb or end inflation by itself, without the need of backup from fiscal policy. McCallum uses many resources to back up his claim, including some that he had written in the past. He talks about how learnability pertains to the subject matter in the paper and economics. Later McCallum goes into depth about what other economists must think and about how monetary solutions are consistent in the rational-expectation solution. There are different economic models mentioned including the New-Keynesian, and several ‘solutions’ including determinacy. With terms such as SOMC, learnability, and Taylor Principle, then there are also economists such as Milton Friedman, McCallum himself, and Karl Brunner just to name a few.

    Read More

  • The Pros and Cons of an Independent Central Bank

    2938 Words  | 6 Pages

    Loungani, Prakash, and Nathan Sheets. "Central bank independence, inflation, and growth in transition economies." Journal of Money, Credit, and Banking (1997): 381-399.

    Read More

  • Current Monetary Policy Of The United States

    2057 Words  | 5 Pages

    The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.

    Read More

  • Importance of Cultural Differences in International Business

    1761 Words  | 4 Pages

    Our economic development will forever be defined as our ability to succeed internationally. PwC forecasts India’s real annual GDP growth until 2050 at 8.9 percent, Vietnam’s at 8.8 percent, and China’s at 5.9 percent. The list of fast-growing emerging markets goes on and on. The U.S. forecast is a meager 2.4 percent, comparable with most Western economies. The domestic companies that are likely to see incremental growth in the coming decades are those that are not only doing business internationally, but that are developing the strategic skill set to master doing business across cultures. Cross-cultural core competence is at the crux of today’s sustainable competitive advantage. For example, political environment will tell us, as to how and why political leaders control, whether and how of international business. Legal environment, both national and international will tell us about many kinds of laws by which business firms must work. The cultural environment will tell us about attitudes, beliefs and opinions important to business people. Economic environment will tell us about the economic system being followed by the host country, which may or may not be different from home country. It will also explain the variables such as level of development, human resources, Gross Domestic Per Capita and consumption patterns that determine a firm’s ability to do business. Geography will tell us about location, quantity, and quality of the world’s resources.

    Read More

  • The Bleak Future of Globalization

    2422 Words  | 5 Pages

    Prasad, Eswar S., et al. “Effects of Financial Globalization on Developing Countries: Some Empirical Evidence.” The National Bureau of Economic Research. National Bureau of Economic Research, 2003. Web. 10 Dec. 2013. .

    Read More

  • Impact of Globalization on Indian Economy

    1556 Words  | 4 Pages

    Countries around the world have closer over past few decades due to growing integration between economies. The main cause behind this growth has been globalization. There can be various definitions of globalization according to different aspects like economic activities, political, technological, cultural interactions. It brings the countries closer to each other and make them more interrelated through providing unrestrained trade and financial exchange. The process of globalisation not only includes opening up of world trade, development of advanced means of communication, internationalisation of financial markets, growing importance of MNC’s, population migrations and more generally increased mobility of persons, goods, capital, data and ideas but also infections, diseases and pollution. Opening up the economy to globalization can have both favourable and unfavourable impact on the country’s economic growth, environment, human capital, cultural dominance etc. Since globalization has been a hot topic over last few decades, it becomes imperative to study its impact on the economic growth of the country.

    Read More

  • Corruption and Globalisation

    5204 Words  | 11 Pages

    International Monetary Fund. WEI, Shang-Jin (2001). Corruption and Globalization. Last accessed on 31 March 2005 at URL: http://www.brookings.edu/comm/policybriefs/pb79.pdf ZEKOS, Georgios I. (2003). Foreign Direct Investment in Digital Economy.

    Read More

  • Macroeconomic Objectives Essay

    1754 Words  | 4 Pages

    It is difficult for government to achieve all the macroeconomics objectives at the same time. Conflicts between macroeconomics objectives means a policy irritating aggregate demand may reduce unemployment in the short term but launch a period of higher inflation and exacerbate the current account of the balance of payments which can also dividend into main objectives and additional objectives (N. T. Macdonald,

    Read More

  • Essay On Effect Of Corruption

    1239 Words  | 3 Pages

    “India was a latecomer to economic reforms, embarking on the process in earnest only in 1991, in the wake of an exceptionally severe balance of payments crisis”(Ahluwalia 2002).The idea being simple ,there was a need to ...

    Read More

  • Inflation And Inflation Essay

    1766 Words  | 4 Pages

    Inflation is the rate at which the purchasing power of currency is falling, consequently, the general level of prices for goods and services is rising. Central banks endeavor to point of confinement inflation, and maintain a strategic distance from collapse i.e. deflation, with a specific end goal to keep the economy running smoothly.

    Read More

More about Pros And Cons Of Inflation Targeting

Open Document