Context
- Due to extreme uncertainty, several adventurous prescriptions have been put forth.
Following are 4 unconventional measures and issues with them are discussed here.
1) Shoud we change the Inflation targeting regime?
- Monetary policy committee (MPC) concluding that elevated inflation has constrained it from easing policy rates further.
- One way out of this is for the government to relax the inflation-targeting framework.
- This would involve greater tolerance for higher levels of inflation or by extending the period over which the MPC has to meet its inflation target.
- Others have suggested shifting from headline to core-inflation as the nominal anchor of monetary policy or incorporating other indicators such as nominal GDP explicitly into the framework.
- The more extreme ones talk about doing away with the inflation targeting framework altogether.
Why changing the inflation targeting regime will not be helpful
- There is a strong argument for the MPC to look beyond the current spike in inflation and ease rates further.
- But disagreements with either the rationale or the stance of the committee members must not be construed as disagreements with the framework.
- Raising the tolerance threshold may sound appealing now, but it will inject a degree of uncertainty and unpredictability in monetary policy.
- Considering that anchoring expectations around the inflation target takes time, frequent revisions are unlikely to help stabilise household expectations.
- While explicitly signalling will be one of deviating from a rule-based framework.
2) What we shift to Multiple Indicator Structure?
- Such a move would bring back the situation of the pre-MPC days.
- In pre-MPC days there was far greater uncertainty over monetary policy.
- In pre-MPC days there was no clarity over the indicator that was dictating the stance of the RBI governor or which indicator would be given preference, and when.
- Such proposals go against the rationale for shifting to such a framework in the first place — an inflation targeting regime.
- Inflationg targeting regime is a well-defined anchor, is meant to facilitate greater transparency and accountability from the central bank.
Way forward
- There must be a concerted attempt to push for more external voices in the MPC.
- In the UK, a non-voting treasury representative sits with the MPC to discuss policy issues.
3) Should central bank effectively financing the Centre’s capital expenditure on a regular basis?
- This is problematic at many levels.
- First, notwithstanding problems in estimating potential output, monetisation, even in the rarest of rare cases, should be the last resort.
- Such an arrangement, risks tilting the balance of power in favour of the government.
- Any government, owing to its short-term political imperatives, is likely to be seduced by the apparent simplicity of this idea.
- Second, giving a central bank a degree of control over the government’s expenditure priorities is not a prudent approach.
- Whatever be their policy inclinations and expenditure priorities, elected representatives have to face voters.
- Why should unelected technocrats be in charge of determining the expenditure priorities of the government?
- Such proposals blur the lines between fiscal and monetary policy and may lead to what some call the fiscalisation of monetary policy.
4) Should government pledge its shares in companies?
- This raises questions. Should a sovereign pledge assets to borrow in the local currency?
- In 1991, India had pledged gold for a foreign currency-denominated loan not a local currency loan.
- So why the collateral? And what happens if the value of the shares pledged falls below that of the loan?
Conclusion
Some unconventional measures may well be needed at the current juncture. But discarding the principles of sound public policy, though it sounds appealing, could end up doing more harm than good.
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