Inflation Targeting
February 14, 2014 Leave a comment
When printing presses started making currency notes, there was trouble. It was too easy to be irresponsible, and print too much “fiat money”.Every currency needs a “nominal anchor”: something that pins fiat money down to reality. There are exactly three choices for this nominal anchor: gold, a foreign currency like the dollar, or the consumer price index (CPI) basket of goods.
The gold standard — where the US dollar was pegged to 35 ounces of gold — fell apart in 1973. Since then, the world has been looking for a new nominal anchor. Pegging to a foreign currency works well in some places, e.g., for Hong Kong. But pegging the Indian rupee to the US dollar is not a viable option, as this is tantamount to handing over the Indian monetary policy to the US Federal Reserve. This is inappropriate as the Indian business cycle is quite different from the US’. Read more of this post
“Had we used the breathing time that this ( Fed’s QE Programme) gave us to address the structural factors and brought the CAD down to its sustainable level, we would have been able to withstand the ‘taper’. In the event, we did not. We, therefore, made ourselves vulnerable to sudden stop and exit of capital flows driven by global sentiment; the eventual cost of adjustment too went up sharply.”-Duvvuri Subbarao,RBI Governor in his farewell speech
A couple of days ago,there were jokes suggesting that the Rupee should tie a rakhi on the Dollar and ask for protection.
wealthymatters 