Political economy-- a reality for central bankers

Sarwar Md. Saifullah Khaled | Published: September 03, 2015 00:00:00 | Updated: November 30, 2024 06:01:00

Addressing the famous Jackson Hole economic symposium of the Kansas City Federal Reserve in Wyoming on August 30, 2015, Raghuram Rajan, governor of the Reserve Bank of India (RBI), said, politics and history both have been important determining forces in the economic policymakers' goals and tactics globally. "Political economy" he said, "is not an aberration, but a reality that should be accounted for in our policy analysis". Interestingly, it is the same forum where he had once famously presented a paper that talked about an imminent global financial crisis, which eventually hit the world in 2007-2008. Â
Terming politics an important determining force in economic policymaking, Mr. Raghuram Rajan said the policy framework in India allows the central bank a "protection" to some extent and its policy has been to take the heat away from the "political economy". He said RBI's policy process involves trying to "take the heat away from the political economy and put it on frameworks, technical models, projections, etcetera, and say, what we are doing is disinflation without worrying too much about distribution. To some extent, that framework allows us protection".
He also mentioned that when it comes to the modern central banks' focus on targeting inflation, it is the "history and political economy" that determines which side of the inflation band needs to be emphasised. It has been argued that the US was focusing on costs attached to low inflation or deflation because of the bankruptcies in the 1920s and 1930s, while the Germany's experience with high inflation in the 1920s explains their focus on protection against high inflation.
While speaking about Japan's aging population at a panel discussion on global inflation dynamics, the RBI governor wondered whether the political power of the elderly were the reason for the country's tolerance for deflation. Others on the panel included Federal Reserve Vice Chairman Stanley Fischer, Bank of England governor Mark Carney and European Central Bank Vice President VÃtorÂ Constancio. While most of the speakers at the symposium talked about major central banks around the world being focused on bringing inflation up, the RBI chief said the lack of price pressure was not a universal problem. He said, "Unlike our other panelists, I have the problem of dealing with the traditional central banker problem of high inflation and the task of bringing it down. We are disinflating in a world of very low global inflation and that has problems." We may add that this is also true about tackling the inflation problems of Bangladesh economy. Â
The RBI governor opined, "My guess is-- this is the same kind of trade-off that Federal policymakers are looking at - move early and have a long period over which you can raise the interest rates gently. That said, I think it's to nobody's interest to get a US moving back into difficulty or into harder times. It is appropriate that the interest rate move be attuned to the conditions in the US economy".
Here we may add that it is also appropriate for the emerging economies including Bangladesh that the interest rates be attuned to the conditions in their respective economies.Â Â
The writer is a retired professor of Economics, BCS General Education Cadre.
sarwarmdskhaled@gmail.com