Page 235 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes Lags of Monetary Policy: The changes in monetary policy do not have a direct link with
the changes in aggregate spending. The links between these two are through the supply,
cost and availability of money. It requires a long-time for monetary policy to have its
effect on aggregate demand. It means monetary policy cannot bring quick changes to
achieve economic stability. Some economists suggest that the central bank should not put
in efforts for short-run economic stabilisation. Rather the central bank should change the
money supply in accordance with the needs of the economy.
Problem in Forecasting: The formulation of an appropriate monetary policy requires that
the magnitude of the problem- recession or inflation is correctly assessed, as it helps in
determining the dose of the medicine. What is more important is to forecast the effects of
monetary actions. In spite of advances made in forecasting techniques, reliable forecasting
of Macro Economic variables remains an enigma.

Case Study Making Bits and Pieces of Monetary Policy Click

t was Immanuel Kant, the German philosopher, who said that the only thing wholly
good in the world was goodwill. Measured by that yardstick, Savak Sohrab Tarapore,
Iformer deputy governor of the Reserve Bank of India (RBI), savant, eminence grise on
a permanent public retainer and now an esteemed columnist for this newspaper, scores a
perfect 10. He was, if you will, for close to a decade, the Gundappa Vishwanath of Indian
central banking, leaving it to others to be a Gavaskar or a Tendulkar.
No further proof is needed than this book, a compilation of articles written for the Gujarati
newspaper Divya Bhaskar. How many central bankers can you think of — and until 1996,
when he retired from the RBI, he was a leading one — who would bother to write in a
‘vernacular’ paper?
These essays also show Dr Tarapore’s doggedness in doing the right thing. At the best of
times, monetary policy and its pretentious attendants are arcane, complex and jargon-
ridden. But, for the reasonably well educated and intelligent reader at least, these essays
should pose no great intellectual challenges.
Collateral Purpose

They also serve a collateral, if unintended, purpose by providing a running commentary
that will prove be invaluable to future historians of the RBI. Only one or two others have
done so, that also mostly in this newspaper.
Until recently, it was Mr S. Venkitaramanan, former RBI Governor who saw India through
the crisis of 1991. The other is Dr Kanakasabapathy who served as the head of the Monetary
Policy Division and later as Secretary to the two Tarapore Committees on capital account
convertibility and then the joint Finance Ministry-RBI Committee on Financial Sector
Assessment (CFSA).
Most of the essays in this book are topical, as they have to be when written for a newspaper.
But the way to read these essays is not to dwell too much on the topics.
When the pieces click
Instead, the reader should focus on the subject, if only to gain an understanding of the
moving bits and pieces of monetary policy. And, then, when you hear the ‘click’, you
know these moving pieces have come together in the way they should.

Contd...

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