Archive for August 5th, 2008

A fair evaluation of inflation targeting regimes

August 5, 2008

I came across this fantastic paper evaluating inflation targeting (IT) from Carl Walsh (University of California, Santa Cruz). I call it fair as it is unlike those papers where authors either want to criticise IT or defend IT (Though, most papers belong to the latter category).

It summarises the broad literature of inflation targeting, compares the experience of both inflation and output (both in terms of levels and volatility), in both developed and emerging economies.

The main idea behind such research is to understand whether IT is necessary to run mon pol? Here is what he says:

Is inflation targeting necessary for good monetary policy? No. In principle, other regimes could also provide the required nominal anchor while still ensuring the flexibility needed to promote overall economic stability. But as a system of maintaining a medium run focus on the controlling inflation, communicating clearly with the public about the ultimate objectives of monetary policy, and in providing a measure of accountability, inflation targeting dominates the alternative choices.

What about the major benefits of IT?

I think the past decade has taught us that transparency and communications are critical for any successful monetary policy. In that sense, this lesson from the inflation targeting pioneers has become an expected part of best practice in monetary policy even among central banks who have not adopted explicit inflation targeting frameworks.

The paper does not talk about negatives of IT and says experience with economies that have adopted IT has generally been positive and no central bank has abandoned IT after adopting it till date. I discussed the negatives of IT earlier where Otmar Issing explains why ECB didn’t go for IT.

I have already touched on several lessons from the inflation targeting experience. IT is feasible and sustainable. There is evidence, particularly among developing economies that inflation targeting has contributed to achieving low and stable inflation. There is no evidence that IT has worsened real economic instability. The potential costs of IT that critics feared have not materialized. Inflation expectations do seem to be better  anchored under IT. The success of IT may be due in part to its modesty, focusing on anchoring expectations rather than steering them.

This does not imply that IT is needed for Central Banks to be successful. All it means is those that have adopted have been successful in managing inflation. But this has been seen in other non IT central banks as well as noted above.

I don’t quite agree to the conclusions he makes on inflation expectations:

The generally restrained behavior of inflation expectations over the past year, dispute significant increases in CPI inflation in most countries, stands in contrast to the experiences of during the 1970s in the face of rising food and energy prices.

I have noted that inflation expectations have been rising in nearly every economy including IT ones. They may not be as high as in 1970s but it does not take much time. People form expectations looking at inflation and if current high levels of inflation persist, so would expectations. Just because expectations are anchored now, does not mean we can take it for granted and focus on other activities. 

Overall a decent read.

Why Khel Ratna only for Dhoni?

August 5, 2008

Once a while, mostly economics discusses gets into sports mainly cricket and tennis. This post is on cricket.

The morning news told me that MS Dhoni, Captain of India’s one day and Twenty-20 side (as of now) has been conferred the Rajeev Gandhi Khel Ratna. It is the highest honor given to a sportsman in India. The key thing to note is sportsman and not cricketer. The awards are given to sportsmen who are currently playing the sport and the award was instituted in 1991.

I was just taking a look at the list of awardees and realised Dhoni is the second cricketer to have received the award after Sachin Tendulkar. Sachin got the award in 1997-98, 8 years after making his debut in 1989 and performing at the highest level. Dhoni has received it in a very short time as he made his one day debut in Dec – 2004 and test match debut in Dec- 2005. Dhoni’s career has been spectacular in especially the shorter versions of the game (one days and T-20) and has led India to memorable wins like the T-20 world cup, famous ODI series win against Australia in Australia. BCCI chief says:

“We are very happy. He has represented the country with distinction, and deserves the honour,” Sharad Pawar, the BCCI president, said. “His exemplary leadership and demeanour under pressure, especially in the Twenty20 World Cup and the tri-series in Australia, has made him an ideal role model for millions of young Indians who want to make a mark in life.”

BCCI chief administrative officer Ratnakar Shetty said:

“What I like most about him, apart from his cricket, is the way he leads,” Shetty said. “He is a cool customer and never gets agitated. He displays clarity of thought and speaks his mind even if it may not be seen in the right sense.”

I have no problems with Dhoni receiving the highest honor, but how can the list of awardees not have cricketers names like Rahul Dravid and Anil Kumble? These guys have performed at the highest level for a much longer time and have contributed heavily to the number of wins in where it matters the most- test matches. As any cricket purist would admit, it is performance in test matches which shows the true character of a cricketer. The popular vote may go to ODIs and now T-20 but pick any cricketer and he would say test matches performance is what matters most to him.

I recall Rahul Dravid was nominated in 2007 but was not given the award. But why wasn’t it pursued the next year? Does it mean the awards are given on form and not on the overall performance? Dravid has not just won matches based on his batting but led India to away-series wins against West Indies in 2005 and England in 2007. WI was a weaker team but the series with England was a superbly fought one. He clearly lost favor with the selectors after leaving captaincy in the middle. But that doesn’t take away his performance and contribution to the team.

And why not Anil Kumble? I don’t remember Anil Kumble even being nominated. He is surely one of the most unsung Indian sportsman of all time.

The BCCI officials mention Dhoni for his leadership quality. On that grounds, the award should have been given to Saurav Ganguly long back. He took the captaincy when India cricket was in dumps as betting scandals were all over the place. He made India a winning combination and we started winning mush more away and at home. So, you give the award to someone who laid the foundation or someone who is carrying the torch further? Even Kumble took up the test match captaincy when no one was willing to take it and has been praised for handling the team and being a fantastic ambassador for India and Indian cricket. His handling of the team in recent Australia series was simply exceptional.

Again, I have no problems with Dhoni getting the award but don’t like the inconsistent policies of BCCI. Dhoni could have waited a bit longer and people like Dravid, Kumble should have been nominated. Recently BCCI didn’t want VVS Laxman and Piyush Chawla to play English County as the County team that offered them had players from rebel cricket league – Indian Cricket League. Laxman was deprived of some good retirement money as he can play cricket for only a couple for years more and Chawla was deprived of some valuable experience. I am not sure what should one say to such policies!!

Assorted Links

August 5, 2008

1. Krugman points how bad any forecast could be and that too from the Maestro- Alan Greenspan

2. WSJ Blog says Fed expected to hold rates but dissents likely

3. DB Blog on regulating entry in business

4. ASB points to 5 articles on mon pol and currency

5. IEB points West Bengal is importing coal despite having such huge coal reserves

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