Thought for the day
”It is not possible to eat me without insisting that I sing
praises of my devourer?”
-
Fyodor Dostoevsky (Russian, 1821-1881)
Word for the day
Moniker (n)
A person's name, especially a nickname or alias.
(Source:
Dictionary.com)
Teaser for the day
How Jaitley's "Growth for poverty" is different
from Nehru's "unbalanced growth" model?
Money debasement is norm, tighter policy
exception
“Inflation is always and everywhere a monetary phenomenon
in the sense that it is and can be produced only by a more rapid increase in
the quantity of money than in output.” - Milton Friedman
In classical economic theory inflation is always a monetary
phenomenon. Seasonal factors or sudden supply shocks affect prices to a limited
extent. Such instances of price rise are invariably temporary and self
correcting.
In recent times, however we have seen multiple challenges to
this classic economic theory of money and price equilibrium. Since 2008 most
central banks, especially those in developed countries, have generally followed
supper expansionary monetary policies.
Bank of Japan (BoJ) and European Central Bank (ECB) in
particular have targeted higher inflation with unprecedented expansionary
monetary policies. The effort so have yielded only marginal result. The
inflation trajectory continues to remain much below the desired level both in
Euro Area and Japan.
(Source: Ice Cap, shows money printed since 2008)
In Indian context, while money growth has remained high for two
decades (M3 grew at 17.2% during 1991-2009), we have seen a distinct downtrend
in recent years. Currently M3 growth stands close to 13%. In past few year, RBI
has monetized just under one fourth of the fiscal deficit.
The price levels have remained stubborn despite tighter money
policy. While the price rise could be partly explained by supply side
bottleneck, seasonal factors, and global supply shocks due to geo-political
concerns, the general rise in price levels over past one decade still needs
explanation.
Consistent debasement of money has been a popular tool of
successive governments in India. There appear to be no change in this policy
paradigm, despite seemingly tighter policy followed in last couple of years.
The stickiness of inflation needs to be seen in this context also.
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