Page 236 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 13: Macro Economic Policies: Monetary Policy

Notes
No one made them click more often than S. S. Tarapore. He can still do it. His essays in this
book, on whether to use forex reserves to finance infrastructure or on how to cope with
capital inflows, whether on capital account convertibility on which he chaired two
committees or on how to use protect the RBI’s virtue by not allowing its balance sheet to
be violated are witness to this.
In the end, the Government and the RBI mostly do go along with his advice. But sometimes
they don’t and then Dr Tarapore simply sighs with disappointment in his essays and in the
knowledge that they will soon realise the error of their ways.

One thing that Dr Tarapore feels very strongly about is the plight of the small saver who
is usually left holding the short end of the stick because of flawed Government policies.
His articles on this topic clearly bring out the anguish of a small saver who has to watch
himself becoming poorer either because of inflation or Government folly.
Like all good men, he too has some bees in his bonnet. He thinks exchange rate policy
should cater to the needs of exporters.
He overlooks, however, the fact a stronger rupee only lowers exporters’ profits, sometimes
from unconscionably high levels, to more reasonable ones. Also, in a country that doesn’t
produce as much as it needs, cheap imports are a must.
Another bee is relates to gold. But this is a good bee, as opposed to a bad one. Dr Tarapore
has for long held the view that India must manage its gold reserves better, and add good
quality gold to them. Happily, after long years of ambivalence, India has begun to adopt
the Tarapore view more actively.
It recently bought 200 tonnes from the IMF! That must have been a very sweet vindication
for a man who had seen India mortgage its gold during the crisis of 1991.
Question:
Do you agree with Dr. Taraporewala’s views that India should have managed its gold
reserves better? Why or why not?
Source: www.hindubusinessline.com
Monetary-lags depend on the time period taken between initial and final results, say changes in
money supply to changes in aggregate demand. If a longer period is taken the longer are the
lags in monetary policy and vice versa.

The lag in the effect of monetary policy can be divided into many parts:
1. Recognition Lag: It means some time period is required to recognise the changes in the
economy so as to change the policy.

2. Action Lag: Once the necessity of change in policy is required, there is a need for some
time to make suitable adjustments or changes in the policy. Some time is required for
working out details and implementing them. The policy action may be controversial. In
that case some delay is inevitable. The delay may be caused by political pressutes. There
may be many other reasons for delay. The action lag period is taken quite close to zero.
3. Inside Lag: The total of recognition lag and action lag is known as inside lag.
4. Outside Lag: After change in the policy, there is need for some time for these changes to
work and affect aggregate spending and income. It is very difficult to analyse the causes of
outside lag because of the involvement of complete inter-relationship in the economic
system. The outside lag can be estimated by statistical inference or direct estimate method
as suggested by Thomas Mayer.

LOVELY PROFESSIONAL UNIVERSITY 231