October 22, 2018

There are no viable alternatives to inflation targeting

Resident Senior Fellow, Vivek Dehejia writes in Mint on why short-run political calculations should not undo the success of the monetary policy framework agreement. Excerpts below:

 

"In the last instalment of this column, I warned that recent appointments by the Narendra Modi-led government to the board of the Reserve Bank of India (RBI) might ultimately be aimed at watering down, or ditching altogether, the monetary policy framework agreement between the RBI and the Union ministry of finance. The agreement enshrines, for the present, an inflation targeting policy mandate for the central bank, to be determined by an independent monetary policy committee, and free from government interference.

 

Those who do not like inflation targeting may well say good riddance if that were to happen. But that would be a short-sighted reaction indeed. As I have noted on numerous occasions in this space, critics of conventional monetary policy frameworks, such as monetary targeting or inflation targeting (which includes me on occasion), have the daunting challenge of coming up with an alternative framework that would be demonstrably superior.

 

Unless one is proposing a return to a gold or some other commodity standard, or to a revamped version of a Bretton Woods-style hybrid system for the global economy (which seems far-fetched), it is hard to find viable alternatives to inflation targeting for India or other emerging economies. The only option is classical exchange rate targeting—in other words, fixing the exchange rate to a major currency, such as the US dollar."

 

Read the full article here.

Topic : State Capacity / In : OP-EDS
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