Friday, 8 January 2016

Of News and Other Stuff (Links mostly)

Apparently Piketty and I agree on how much economists know about anything...almost nothing.

Also you call yourself a science? Compared to this stuff, economics is pure hokum.

And it's scary given how much economics influences policy. Like after months of study, and deliberation, the whole idea of the RBI targeting the CPI is turning out to be not that great. And that's in spite of their success in achieving the target. Essentially, while the CPI inflation turned out to near target levels, such that the returns on savings for consumers is attractive, the negative WPI has meant that the borrowing cost of investment [nominal rate of interest minus (minus WPI inflation)] is too high. Lower borrowing means lower investment which means lower real growth. So the projected tax revenues, calculated on an assumed growth rate cannot be met. More so, because the projection is based on the nominal growth rate, which a priori is expected to be higher than the real growth rate. This turns out to be wrong however, when inflation rates (that is the WPI or the GDP deflator-which in turn reflects the WPI more closely than the CPI) are low or negative.

Ila Patnaik argues  that the conversation about inflation targeting is misplaced. Whether it is the WPI or the CPI, the government should concentrate on keeping inflation low (which will more likely be missed if the fiscal deficit is high). Hence she roots for a mix of easy monetary and tight fiscal policy, where the fiscal policy, instead of the monetary policy directly attacks inflation. The reverse-where the there is a easy fiscal and tight monetary policy is not the best option because higher government spending could crowd out private investment if it raises rates of interest-in this case a tight monetary policy will aggravate things further. In India, such a policy is defended on the grounds that monetary policy transmits only weakly while government spending increases aggregate demand immediately. Patnaik argues that government expenditure is often allocated, but the spending takes place only with a lag. Moreover private companies already have stressed loans they have to repay, so it is unwise to burden them more with a tight monetary policy.

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