{"id":35921,"date":"2018-11-01T12:18:16","date_gmt":"2018-11-01T06:48:16","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=35921"},"modified":"2018-11-01T12:18:16","modified_gmt":"2018-11-01T06:48:16","slug":"pluralism-in-monetary-policy-framework","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/pluralism-in-monetary-policy-framework\/","title":{"rendered":"Pluralism in monetary policy framework:\u00a0"},"content":{"rendered":"<p><a href=\"http:\/\/www.livemint.com\/Opinion\/uHmSdkmRBiRhZiunKQxWoL\/Pluralism-in-monetary-policy-framework.html\"><span style=\"font-weight: 400;\">Pluralism in monetary policy framework<\/span><\/a><span style=\"font-weight: 400;\">:\u00a0<\/span><\/p>\n<p><b>Context:<\/b><\/p>\n<p><span style=\"font-weight: 400;\">In spite of having sophisticated model at its disposal, the RBI\u2019s performance on accurate inflation forecasting leaves much to be desired.<\/span><\/p>\n<p><b>Background:<\/b><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">India formally adopted \u201cflexible-inflation targeting\u201d (FIT) in June last year. A key feature of FIT is that monetary policy has an explicit inflation target in the long-term but medium-term inflation \u201cprojections\u201d become the intermediate target. The success of FIT depends on the accuracy of medium-term inflation forecasts.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The Reserve Bank of India (RBI) introduced models called the forecasting and policy analysis system (FPAS).<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Central to the FPAS is the quarterly projection model (QPM), a forward-looking model to assess the medium term path of the economy.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The model consists of four equations related to the key endogenous variable like the IS curve (output gap), the Phillips curve (inflation), smoothed Taylor rule (short-term interest rate), and uncovered interest rate parity (exchange rate).<\/span><\/li>\n<li><span style=\"font-weight: 400;\">In December 2016, RBI\u2019s monetary policy committee (MPC) forecast that headline inflation in India in January-March would average 5% with an upside bias.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The actual inflation turned out to be 3.6%, a massive 140 basis points lower than the forecast and the highest percentage forecasting error in RBI\u2019s history.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">CPI (Consumer Price Index) inflation in June eased to 1.54%, a record low, while the RBI continues to forecast an average of 2.75% for the first half of FY18.<\/span><\/li>\n<\/ul>\n<p><b>Criticisms:<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The model has been criticized for relying on rational expectations, assuming complete markets, ignoring the financial sector and for creating models which are \u201cmoney-neutral\u2019.<\/span><\/p>\n<p><b>Solutions:<\/b><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\"> \u00a0<\/span><span style=\"font-weight: 400;\">Improve the DSGE framework by relaxing unrealistic assumptions and incorporating more features of the Indian economy, such as a large informal sector and an all-pervading shadow economy.<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> \u00a0<\/span><span style=\"font-weight: 400;\">Explore alternative approaches which make realistic assumptions and incorporate the complexity of the real world.<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> \u00a0<\/span><span style=\"font-weight: 400;\">The Economic Complexity Index developed using this approach is a more accurate predictor of GDP per capita than many competing growth theories.<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> \u00a0<\/span><span style=\"font-weight: 400;\">RBIs highly capable economists can develop parallel models by applying alternative approaches to the Indian context.<\/span><\/li>\n<\/ul>\n<p><b>Conclusion:<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Pluralism is critical for all social sciences and economics is no exception. Exploring multiple schools of thought can only improve the framework\u2019s accuracy and effectiveness of India\u2019s monetary policy framework.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Pluralism in monetary policy framework:\u00a0 Context: In spite of having sophisticated model at its disposal, the RBI\u2019s performance on accurate inflation forecasting leaves much to be desired. Background: India formally adopted \u201cflexible-inflation targeting\u201d (FIT) in June last year. A key feature of FIT is that monetary policy has an explicit inflation target in the long-term&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/pluralism-in-monetary-policy-framework\/\">Continue reading <span class=\"screen-reader-text\">Pluralism in monetary policy framework:\u00a0<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[555],"tags":[],"class_list":["post-35921","post","type-post","status-publish","format-standard","hentry","category-test-1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704759995},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/35921","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\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=35921"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/35921\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=35921"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=35921"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=35921"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}