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RBI governor admits political economy a reality
01
Sep '15
Reserve Bank of India Governor Raghuram Rajan has said that the role of politics and history is a little-discussed but important force in determining the goals and tactics of economic policy makers, according to media reports.

Speaking at the Federal Reserve Bank of Kansas City's annual economic symposium in Wyoming, he said that when it comes to modern central banks' focus on targeting inflation, “which side of the inflation band is emphasized stems from history and political economy.”

Rajan said the framework in India allows the central bank a "protection" to some extent and its policy has been to take the heat away from the "political economy".

Rajan said RBI's policy process involves trying to "take the heat away from the political economy and put it on frameworks, technical models, projections, etc, and say, 'What we are doing is disinflation without worrying too much about distribution'.

"To some extent, that framework allows us protection".

He said some have argued the US focus on the costs of low inflation or deflation reflects in part farm and business bankruptcies in the 1920s and 1930s, while the German experience with very high inflation in the 1920s “would explain the focus on the upper bound, that is, protecting against high inflation.” He also asked if Japan's aging population and “the political power of the elderly” might help explain the country's tolerance for deflation.

Rajan said that “political economy is not an aberration, but a reality that should be accounted for in our policy analysis.”

The RBI chief noted that he is trying to bring down India's high inflation rate while navigating complications like manufacturers who are hurt by higher interest rates and a stronger currency. (SH)

Fibre2Fashion News Desk – India

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