An inflation targeting policy regime for India?

Richard Clarida's recent paper could be key for policymakers in deciding whether India should move to an 'inflation targeting policy regime', says Vivek Dehejia.

What have we learned - and not learned - from the global financial crisis, the aftershocks of which still rumble to this day? 

In particular, has the crisis rubbished conventional thinking about the theory and practice of monetary policy that had developed into a near-consensus in the preceding period of the "great moderation"?

Or does that theory and practice, suitably modified, hold valuable lessons for the future, once the immediate crisis is past and the advanced economies emerge from the "zero lower bound" on short-term interest rates? 

A recent paper by Richard Clarida (Monetary Policy in Open Economies: Practical Perspectives for Pragmatic Central Bankers, May 2014) casts important light on these questions. 

Clarida, who taught me, is an economics professor at ColumbiaUniversity, and was a senior official in the US Treasury Department during the administration of President George W Bush. 

More pertinent for the current discussion, Clarida, along with economists Jordi Gali and Mark Gertler, codified what has since become the canonical model with which to study the theory of optimal monetary policy, in a series of influential papers published in the late 1990s and early 2000s. 

A principal finding of the Clarida-Gali-Gertler framework is that, in a "New Keynesian" dynamic economy, which experiences exogenous shocks, and in which nominal prices are "sticky" or slow to adjust, the optimal monetary policy boils down to a form of "flexible inflation targeting".

That is, a central bank - which cares both about the deviations of inflation from its target level and deviations of output from its trend (the "output gap") - adjusts its policy instrument (the short-term interest rate) gradually to bring inflation back toward its target level. 

A second key finding is that this optimal policy may be implemented through a version of what is known in the monetary economics literature as a "Taylor rule". This is a feedback rule for the short-term policy rate - originally proposed by economist John Taylor - which is a function both of inflation and the output gap. The difference here is that unlike Taylor's original formulation, which is backward-looking, an optimal Taylor rule targets expected future inflation, not past inflation (although the latter may well be a good guide to the former). 

It is also worth noting that the Clarida-Gali-Gertler result applies not only to a "closed" economy (in practice, a large economy such as the US, in which domestic economic considerations are paramount, and in which the international economy enters only secondarily) but also to "open" economies (such as India and advanced and emerging economies that are significantly dependent on international trade and financial flows).

This emerges from an "isomorphism" result - which says, roughly, that the closed and open economy policy problems are structurally similar, under a set of reasonable simplifying assumptions. 

Is this theory - which encapsulates the pre-crisis conventional wisdom, sometimes called the "Jackson Hole consensus" - still valid today, in a world of near-zero interest rates in the advanced economies and characterised by unconventional monetary policies such as large-scale asset purchases ("quantitative easing") and "forward guidance"? 

Clarida argues, persuasively, that the answer is "yes", in particular, once the advanced economies escape from the zero lower bound and "liquidity trap" in which they currently find themselves. 

He summarises his conclusions thus: "The framework suggests that good macroeconomic outcomes in open economies are possible by focusing on inflation targeting that is implemented by a Taylor-type rule, a rule that in equilibrium is reflected in the exchange rate as an asset price, just as it is reflected in long-term bond yields via the expectation channel for the expected future policy rate…" 

The crucial corollary is that optimal monetary policy will, in general, not be consistent with a fixed (or even a "stable") exchange rate, but, rather, to achieve its goal of stabilising inflation and the output gap, the exchange rate will, in effect, follow a "random walk" (or exhibit a "unit root", in the language of statistics). 

A second, and surprising, corollary, is that optimal monetary policy implemented through a Taylor-type rule will, in the short run, push the nominal exchange rate in the opposite direction than would be implied by "purchasing power parity" or PPP ( a long-run equilibrium situation in which exchange rates have reached their fundamental levels), in the event of a "cost push" (supply-side) shock. This is true, even though, in the long run, the nominal exchange rate must, in expectation, accord with PPP. 

As Clarida says about this seemingly paradoxical result: "So what at first glance might appear to be an indictment of monetary policy by Taylor rule in the open economy - that it pushes the exchange rate away from PPP in response to inflation shocks - is actually a property of optimal policy!" 

Here in India, policymakers, central bank officials, and economists interested in the theory and practice of monetary policy ought seriously to weigh these findings, as they impinge importantly on the ongoing debate as to whether India ought to move towards an inflation targeting policy regime. 

Clarida's timely new paper gives those on all sides of this debate much food for thought. 

The writer is an economics professor at Carleton University in Ottawa, Canada, and is co-author of Indianomix: Making Sense of Modern India (Random House India, 2012). 

Vivek Dehejia

10 things that the Modi govt is doing WRONG

B S Raghavan, a Chennai-based retired bureaucrat, lists here ten things that the Narendra Modi government is doing wrong. With a dawn of new regime in New Delhi, he says, "One expected to see verdant new shoots of change in the outlook, mindset and conduct of the government" but the high hopes are being shaken as "one sees dreary desert sands of dead habits".

Here are 10 things the Modi government is doing wrong:

This piece in response to this: 10 things that the Modi government is doing right

ONE: Falling for the glitter of foreign photo-ops: They mean nothing and could have waited until crying domestic ills were addressed. Modi must first till the home ground before he goes calling.

TWO: Failing to set out his priorities and approach by interventions in Parliament and addressing mass meetings in strategic locations (Kolkata, Chennai) a la his election campaign

THREE: Neglecting to cultivate the south. The Bharatiya Janata Party and Modi are still seen as north Indian aliens by people of the south. Names of schemes are in Hindi, speeches are in Hindi, and hardly any political figure of consequence in the government has visited the south after the government took charge.

FOUR: Persisting with nondescript and shady characters as ministers who soon will become either loose cannons or puppets in the hands of bureaucracy. They are yet to make any impression on the people. Smriti Irani has a charming presence and good repertoire of words, and renders them mellifluously and fluently, but comes through as immature and shifty.

FIVE: Indulging in slick coinages like HIT( recently spoke about it in Nepal). They will detract from prime minister’s gravitas, and will be seen as school-boyish gimmickry.

SIX: The PM's website is proving to be a gimmick. It is visitor-hostile, full of glitches and elicits no response to any of the messages. Large numbers who thought it was a hotline with the prime minister are disillusioned and Modi is becoming the target of their anger.

SEVEN: Resorting to spin rather than working hard to deliver solid, tangible outcomes. Making out that Modi’s exhortation to the secretaries is a first or going to town about the dos and don'ts for bureaucrats as a revolutionary step is nothing but spin. Both practices are as old as the hills. They have once again been dusted up, that's all.

EIGHT: No zing or pep in government. It is seen to be lack-lustre, languid and lackadaisical. It has made no difference to the cutting edge. US President Franklin Roosevelt set up the entire framework of the New Deal to break the back of the Great Depression in just one month.

NINE: No effort made by Modi to ensure smooth functioning of the Lok Sabha. By being constantly present, as Nehru was, and intervening now and again to set things right, as Nehru did, would have made an impact. The new Speaker is as ineffective as the previous one.

TEN: Where one expected to see verdant new shoots of change in outlook, mindset and conduct, one sees "dreary desert sands of dead habits".

This above column was written before the Prime Minister delivered his Independence Day speech on August 15.

the old hndu philosophy

According to the Hinduism, fasting helps create an attunement with the Absolute by establishing a harmonious relationship between the body and the soul. This is thought to be imperative for the well being of a human being as it nourishes both his/her physical and spiritual demands.
Science behind fasting is revealed.
Fasting triggers stem cell regeneration of immune system.
Fasting can reduce cholesterol levels in prediabetic (Prediabetes means the amount of glucose, also called sugar, in the blood is higher than normal but not high enough to be called diabetes.) people over extended period of time, according to a new research.
The research on periodic fasting has identified a biological process in the body that converts bad cholesterol in fat cells to energy, thus combating diabetes risk factors.

The fact world does not know

Before the British attempted to colonize India, this was the land of enchantment & mystery. It was known for its rich resources, minerals & vegetable as well as a deep spiritual heritage. Diamonds were plentiful in India prior to the 19th century.& they were found along the banks & rivers of this exotic locale even though today they are absent. other deposits of diamonds had yet to be discovered & for that reason India became synonymous with diamonds & their magical & mystical lore.
The first diamonds came from INDIA. And for centuries , India was the only place one could find these precious stones.

The science of religions

Indian Customs Vs Scientific Reasons Traditions in Hinduism were considered mainly as superstitions, but with the advent of science, it is becoming evident that these traditions are based on some scientific knowledge and moved from generations to generations as traditions. Though the common people did not know science in it, they were following it very faithfully over the years. This blog is an attempt to bring forward the science involved in these traditions and rituals...
1. Throwing Coins into a River: The general reasoning given for this act is that it brings Good Luck. However, scientifically speaking, in the ancient times, most of the currency used was made of copper unlike the stainless steel coins of today. Copper is a vital metal very useful to the human body. Throwing coins in the river was one way our fore-fathers ensured we intake sufficient copper as part of the water as rivers were the only source of drinking water. Making it a custom ensured that all of us follow the practice.
2. Joining Both Palms together to Greet: In Hindu culture, people greet each other by joining their palms - termed as “Namaskar.” The general reason behind this tradition is that greeting by joining both the palms means respect. However, scientifically speaking, joining both hands ensures joining the tips of all the fingers together; which are denoted to the pressure points of eyes, ears, and mind. Pressing them together is said to activate the pressure points which helps us remember that person for a long time. And, no germs since we don’t make any physical contact!
3. Why do Indian Women wear Toe Ring: Wearing toe rings is not just the significance of married women but there is science behind it. Normally toe rings are worn on the second toe. A particular nerve from the second toe connects the uterus and passes to heart. Wearing toe ring on this finger strengthens the uterus. It will keep it healthy by regulating the blood flow to it and menstrual cycle will be regularized. As Silver is a good conductor, it also absorbs polar energies from the earth and passes it to the body.
4. Applying Tilak on the Forehead: On the forehead, between the two eyebrows, is a spot that is considered as a major nerve point in human body since ancient times. The Tilak is believed to prevent the loss of "energy", the red 'kumkum' between the eyebrows is said to retain energy in the human body and control the various levels of concentration. While applying kumkum the points on the mid-brow region and Adnya-chakra are automatically pressed. This also facilitates the blood supply to the face muscles.
5. Why do Temples have Bells: People who are visiting the temple should and will Ring the bell before entering the inner sanctum (Garbhagudi or Garbha Gruha or womb-chamber) where the main idol is placed. According to Agama Sastra, the bell is used to give sound for keeping evil forces away and the ring of the bell is pleasant to God. However, the scientific reason behind bells is that their ring clears our mind and helps us stay sharp and keep our full concentration on devotional purpose. These bells are made in such a way that when they produce a sound it creates a unity in the Left and Right parts of our brains. The moment we ring the bell, it produces a sharp and enduring sound which lasts for minimum of 7 seconds in echo mode. The duration of echo is good enough to activate all the seven healing centres in our body. This results in emptying our brain from all negative thoughts.
6. Why do we have Navratras: Our living style has drastically changed if we compare it to the society hundreds & thousands of years ago. The traditions which we follow in present are not establishments of today but of the past. Ever thought, why do we have Navratras twice a year unlike other festivals like Deepawali or Holi? Well, both these months are the months of changing seasons and the eating habits of both the seasons are quite different from each other. Navratras give enough time to the body to adjust and prepare itself for to the changing season. These nine days were marked as a period when people would clean their body system by keeping fasts by avoiding excessive salt and sugar, meditate, gain a lot of positive energy, gain a lot of self confidence & increase the self determination power (fasts are a medium to improve our will power and self determination) and finally get ready for the challenges of the changed season.
7. Why do we worship Tulsi Plant: Hindu religion has bestowed ‘Tulsi’, with the status of mother. Also known as ‘Sacred or Holy Basil’, Tulsi, has been recognized as a religious and spiritual devout in many parts of the world. The vedic sages knew the benefits of Tulsi and that is why they personified it as a Goddess and gave a clear message to the entire community that it needs to be taken care of by the people, literate or illiterate. We try to protect it because it is like Sanjeevani for the mankind. Tulsi has great medicinal properties. It is a remarkable antibiotic. Taking Tulsi everyday in tea or otherwise increases immunity and help the drinker prevent diseases, stabilize his or her health condition, balance his or her body system and most important of all, prolong his or her life. Keeping Tulsi plant at home prevents insects and mosquitoes from entering the house. It is said that snakes do not dare to go near a Tulsi plant. Maybe that is why ancient people would grow lots of Tulsi near their houses.
8. Why do we worship Peepal Tree: ‘Peepal’ tree is almost useless for an ordinary person, except for its shadow. ‘Peepal’ does not a have a delicious fruit, its wood is not strong enough for any purpose then why should a common villager or person worship it or even care for it? Our ancestors knew that ‘Peepal’ is one of the very few trees (or probably the only tree) which produces oxygen even at night. So in order to save this tree because of its unique property they related it to God/religion.
9. Start with Spice & End with Sweet: Our ancestors have stressed on the fact that our meals should be started off with something spicy and sweet dishes should be taken towards the end. The significance of this eating practice is that while spicy things activate the digestive juices and acids and ensure that the digestion process goes on smoothly and efficiently, sweets or carbohydrates pulls down the digestive process. Hence, sweets were always recommended to be taken as a last item.
10. Choti on the Male Head: Sushrut rishi, the foremost surgeon of Ayurveda, describes the master sensitive spot on the head as Adhipati Marma, where there is a nexus of all nerves. The shikha protects this spot. Below, in the brain, occurs the Brahmarandhra, where the sushumnã (nerve) arrives from the lower part of the body. In Yog, Brahmarandhra is the highest, seventh chakra, with the thousand-petalled lotus. It is the centre of wisdom. The knotted shikhã helps boost this centre and conserve its subtle energy known as ojas.
11. Applying Mehendi/Henna on the Hand: Besides lending color to the hands, mehndi is a very powerful medicinal herb. Weddings are stressful, and often, the stress causes headaches and fevers. As the wedding day approaches, the excitement mixed with nervous anticipation can take its toll on the bride and groom. Application of mehndi can prevent too much stress because it cools the body and keeps the nerves from becoming tense. This is the reason why mehndi is applied on the hands and feet, which house nerve endings in the body.
12. Celebration & Cleaning During Diwali: Diwali usually falls in October or November which marks the start of winter season and end of rainy season. Rainy season wasn't a good time for everyone back then; many homes needed repair and renovation after a heavy fall. That is why time before diwali was considered the period during which everyone can indulge in cleaning and beautification of their home. And also take out their winter clothes and pack the summer ones.
13. Sitting on the Floor & Eating: This tradition is not just about sitting on floor and eating, it is regarding sitting in the “Sukhasan” position and then eating. Sukhasan is the position we normally use for Yoga asanas. Sitting in this position while eating helps in improving digestion as the circulatory system can focus solely upon digestion and not on our legs dangling from a chair or supporting us while we are standing.
14. Why not to sleep with Your Head towards North: Myth is that it invites ghost or death but science says that it is because human body has its own magnetic field (Also known as hearts magnetic field, because the flow of blood) and Earth is a giant magnet. When we sleep with head towards north, our body's magnetic field become completely asymmetrical to the Earth's Magnetic field. That cause problems related to blood pressure and our heart needs to work harder in order to overcome this asymmetry of Magnetic fields. Apart from this another reason is that Our body have significant amount of iron in our blood. When we sleep in this position, iron from the whole body starts to congregate in brain. This can cause headache, Alzheimer’s Disease, Cognitive Decline, Parkinson disease and brain degeneration.
15. Surya Namaskar: Hindus have a tradition of paying regards to Sun God early in the morning by their water offering ritual. It was mainly because looking at Sun rays through water or directly at that time of the day is good for eyes and also by waking up to follow this routine, we become prone to a morning lifestyle and mornings are proven to be the most effective part of the day.
16. Ear Piercing in Children: Piercing the ears has a great importance in Indian ethos. Indian physicians and philosophers believe that piercing the ears helps in the development of intellect, power of thinking and decision making faculties. Talkativeness fritters away life energy. Ear piercing helps in speech-restraint. It helps to reduce impertinent behaviour and the ear-channels become free from disorders. This idea appeals to the Western world as well, and so they are getting their ears pierced to wear fancy earrings as a mark of fashion.
17. Application of Sindoor or Vermillion: It is interesting to note that that the application of sindoor by married women carries a physiological significance. This is so because Sindoor is prepared by mixing turmeric-lime and the metal mercury. Due to its intrinsic properties, mercury, besides controlling blood pressure also activates sexual drive. This also explains why Sindoor is prohibited for the widows. For best results, Sindoor should be applied right upto the pituitary gland where all our feelings are centered. Mercury is also known for removing stress and strain.
18. The scientific explanation of ouching Feet(charan sparsh): Usually, the person of whose feet you are touching is either old or pious. When they accept your respect which came from your reduced ego (and is called your shraddha) their hearts emit positive thoughts and energy (which is called their karuna) which reaches you through their hands and toes. In essence, the completed circuit enables flow of energy and increases cosmic energy, switching on a quick connect between two minds and hearts. To an extent, the same is achieved through handshakes and hugs. The nerves that start from our brain spread across all your body. These nerves or wires end in the fingertips of your hand and feet. When you join the fingertips of your hand to those of their opposite feet, a circuit is immediately formed and the energies of two bodies are connected. Your fingers and palms become the ‘receptor’ of energy and the feet of other person become the ‘giver’ of energy.
19. Why do we Fast: The underlying principle behind fasting is to be found in Ayurveda. This ancient Indian medical system sees the basic cause of many diseases as the accumulation of toxic materials in the digestive system. Regular cleansing of toxic materials keeps one healthy. By fasting, the digestive organs get rest and all body mechanisms are cleansed and corrected. A complete fast is good for heath, and the occasional intake of warm lemon juice during the period of fasting prevents the flatulence. Since the human body, as explained by Ayurveda, is composed of 80% liquid and 20% solid, like the earth, the gravitational force of the moon affects the fluid contents of the body. It causes emotional imbalances in the body, making some people tense, irritable and violent. Fasting acts as antidote, for it lowers the acid content in the body which helps people to retain their sanity. Research suggests there are major health benefits to caloric restriction like reduced risks of cancer, cardiovascular diseases, diabetes, immune disorders etc.
20. Why Idol Worship: Hinduism propagates idol worship more than any other religion. Researchers say that this was initiated for the purpose of increasing concentration during prayers. According to psychiatrists, a man will shape his thoughts as per what he sees. If you have 3 different objects in front of you, your thinking will change according to the object you are viewing. Similarly, in ancient India, idol worship was established so that when people view idols it is easy for them to concentrate to gain spiritual energy and meditate without mental diversion.
21. Why do Indian Women wear Bangles: Normally the wrist portion is in constant activation on any human. Also the pulse beat in this portion is mostly checked for all sorts of ailments. The Bangles used by women are normally in the wrist part of ones hand and its constant friction increases the blood circulation level. Further more the electricity passing out through outer skin is again reverted to one's own body because of the ring shaped bangles, which has no ends to pass the energy outside but to send it back to the body.