{"id":250016,"date":"2023-06-29T19:52:55","date_gmt":"2023-06-29T14:22:55","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=250016"},"modified":"2023-08-31T14:41:16","modified_gmt":"2023-08-31T09:11:16","slug":"central-bank-credibility-is-key-to-achieving-a-goldilocks-economy","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/central-bank-credibility-is-key-to-achieving-a-goldilocks-economy\/","title":{"rendered":"Central bank credibility is key to achieving a Goldilocks economy"},"content":{"rendered":"\n

Source<\/span><\/b>: The post is based on the article \u201c<\/span>Central bank credibility is key to achieving a Goldilocks economy<\/span><\/b>\u201d published in \u201c<\/span>Mint<\/span><\/b>\u201d on <\/span>29th June 2023<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n

Syllabus<\/span><\/b>: GS 3 \u2013 Indian Economy<\/span>\u00a0<\/span><\/p>\n

News<\/span><\/b>:\u00a0<\/span>To uphold its credibility, the Reserve Bank of India (RBI) should strive to achieve its 4 percent inflation target while accurately estimating India’s real equilibrium rate of interest.<\/span> (The RBI decided to leave the repo rate unchanged at 6.5 percent).<\/span>\u00a0<\/span><\/p>\n

Why is central bank credibility important?<\/span><\/b>\u00a0<\/span><\/h2>\n

Central bank credibility is important, particularly in <\/span>steering an economy after a shock<\/span><\/b> such as a financial crisis or a pandemic. <\/span>\u00a0<\/span><\/p>\n

Central bank credibility makes disinflation m<\/span>ore manageable<\/span>, and the interest rate increases needed to stabilize inflation expectations are less severe.<\/span>\u00a0<\/span><\/p>\n

Why is there a two-percentage point band on either side of the target of 4.0 percent?<\/span><\/b>\u00a0<\/span><\/h2>\n

It ensures that the RBI d<\/strong><\/span>oes not overreact to the short-term inflationary pressures<\/span><\/b> of temporary supply shocks and maintains a medium to long term view while conducting monetary policy. <\/span>\u00a0<\/span><\/p>\n

While it gives the RBI <\/span>operational freedom<\/span><\/b> in the short run, the mandate over the medium term is to keep inflation near 4 percent. <\/span>\u00a0<\/span><\/p>\n

Sticking to this mandate ensures monetary policy credibility.<\/span>\u00a0<\/span><\/p>\n

What will be the impact of RBI\u2019s efforts to bring inflation close to the target of 4.0 percent?<\/span><\/b>\u00a0<\/span><\/h2>\n

Maintaining the current level of interest rates for an extended period will <\/span>impact economic activity negatively <\/span><\/b>during a period when the Indian economy is growing at a steady rate, neither too fast nor too slow. <\/span>\u00a0<\/span><\/p>\n

The consecutive increases in the repo rate have brought the <\/span>real interest rate close to equilibrium levels<\/span><\/b> and have also anchored inflation expectations. <\/span>\u00a0<\/span><\/p>\n

However, as anticipated inflation declines, it is important to ensure that the real repo rate does not rise excessively.<\/span>\u00a0<\/span><\/p>\n

Why is estimating the equilibrium real interest rate challenging?<\/span><\/b>\u00a0<\/span><\/h2>\n

The ideal real interest rate in an economy depends on various interconnected factors, including savings behaviour, investment activity, demographics, and potential growth rate.<\/span>\u00a0<\/span><\/p>\n

However, estimating the equilibrium real interest rate is challenging as it is <\/span>not directly observable<\/span><\/b>. Additionally, the estimate of the equilibrium real interest rate <\/span>can change over time<\/span><\/b>. <\/span>\u00a0<\/span><\/p>\n

Economists from the Bank of International Settlements have suggested that the <\/span>central bank’s actions<\/span><\/b> can influence the real equilibrium interest rate, which is commonly believed to be beyond its control.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Source: The post is based on the article \u201cCentral bank credibility is key to achieving a Goldilocks economy\u201d published in \u201cMint\u201d on 29th June 2023.\u00a0 Syllabus: GS 3 \u2013 Indian Economy\u00a0 News:\u00a0To uphold its credibility, the Reserve Bank of India (RBI) should strive to achieve its 4 percent inflation target while accurately estimating India’s real… Continue reading Central bank credibility is key to achieving a Goldilocks economy<\/span><\/a><\/p>\n","protected":false},"author":10356,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,8184,11125],"class_list":["post-250016","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-indian-economy","tag-mint","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/250016","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10356"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=250016"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/250016\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=250016"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=250016"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=250016"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}