December 04, 2019

Opinion | Time for the orchestrated use of three different economic levers

In this piece for Mint, Niranjan Rajadhyaksha looks at three mental models to understand economic stress and concludes that the coordinated use of monetary, fiscal and exchange rate levers would need to be a nuanced act. Excerpt:



"The first mental model tells us that governments that have gone on a fiscal splurge rapidly expand money supply to earn the seigniorage necessary to fund an unsustainable fiscal deficit. There is neither enough tax collections nor domestic savings to bridge the widening gap in public finances. The rapid expansion in money supply then leads to high inflation. Macroeconomic stress is thus rooted in an unsustainable fiscal policy, though the proximate cause is high inflation from monetary expansion. This has broad parallels with what went wrong in many Latin American countries in the 1980s and perhaps 1990 India as well."



Read the full article here.


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