Monetary Policy

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Monetary Policy

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Title: Monetary Policy


1
Monetary Policy
  • RBI and Monetary Policy in India

2
Monetary Magnitudes
  • M1 Currency with public
  • Demand deposits with banks Other
    Deposits with RBI
  • M2 M1 Post Office Deposits
  • M3 M1 Time Deposits with Banks
  • M4 M3 Total Post Office Deposits

3
Growth of M3 and Differential Contribution of
Components
  • Source RBI-Macroeconomic and Monetary
    Developments Third Quarter Review 2005-06

4
What is Monetary Policy?
  • The term monetary policy refers to actions taken
    by central banks to affect monetary magnitudes or
    other financial conditions.
  • Monetary Policy operates on monetary magnitudes
    or variables such as money supply, interest rates
    and availability of credit.
  • Monetary Policy ultimately operates through its
    influence on expenditure flows in the economy.
  • In other words affects liquidity and by affecting
    liquidity, and thus credit, it affects total
    demand in the economy.

5
Credit Policy
  • Central Bank may directly affect the money supply
    to control its growth.
  • Or it might act indirectly to affect cost and
    availability of credit in the economy.
  • In modern times the bulk of money in developed
    economies consists of bank deposits rather than
    currencies and coins.
  • So central banks today guide monetary
    developments with instruments that control over
    deposit creation and influence general financial
    conditions.
  • Credit policy is concerned with changes in the
    supply of credit.
  • Central Bank administers both the Credit and
    Monetary policy

6
Aims of Monetary policy
  • MP is a part of general economic policy of the
    govt.
  • Thus MP contributes to the achievement of the
    goals of economic policy.
  • Objective of MP may be
  • Full employment
  • Stable exchange rate
  • Healthy BoP
  • Economic growth
  • Reasonable Price Stability
  • Greater equality in distribution of income
    wealth
  • Financial stability

7
Price Stability The Dominant Objective
  • There is convergence of views in developed and
    developing economies, that price stability is the
    dominant objective of monetary policy.
  • Price stability does not mean complete
    year-to-year price stability which is difficult
    to attain.
  • Price stability refers to the long run average
    stability of prices.
  • Price stability involves avoidance of both
    inflationary and deflationary pressures.

8
Contd..
  • Price Stability contributes improvements in the
    standard of living of people.
  • It promotes saving in the economy while
    discouraging unproductive investment.
  • Stable prices enable exports to compete in
    international markets and contribute to the
    strengthening of BoP.
  • Price stability leads to interest rate stability,
    and exchange rate stability (via export import
    stability).
  • It contributes to the overall financial stability
    of the economy.

9
Operation of Monetary Policy
  • Instruments
  • Discount Rate
  • (Bank Rate)
  • 2.Reserve Ratios
  • 3. Open Market
  • Operations
  • Operating
  • Target
  • Monetary Base
  • Bank Credit
  • Interest Rates
  • Intermediate
  • Target
  • Monetary
  • Aggregates(M3)
  • Long term
  • interest rates
  • Ultimate
  • Goals
  • Total Spending
  • Price Stability
  • Etc.

10
Instruments of Monetary Policy
  • Variations in Reserve Ratios
  • Discount Rate (Bank Rate)
  • (also called rediscount rate)
  • Open Market Operations (OMOs)
  • Other Instruments

11
Variations in Reserve Ratios
  • Banks are required to maintain a certain
    percentage of their deposits in the form of
    reserves or balances with the RBI
  • It is called Cash Reserve Ratio or CRR
  • Since reserves are high-powered money or base
    money, by varying CRR, RBI can reduce or add to
    the banks required reserves and thus affect
    banks ability to lend.

12
Discount Rate (Bank Rate)
  • Discount rate is the rate of interest charged by
    the central bank for providing funds or loans to
    the banking system.
  • Funds are provided either through lending
    directly or rediscounting or buying commercial
    bills and treasury bills.
  • Raising Bank Rate raises cost of borrowing by
    commercial banks, causing reduction in credit
    volume to the banks, and decline in money supply.
  • Variation in Bank Rate has an effect on the
    domestic interest rate, especially the short term
    rates.
  • Market regards the increase in Bank rate as the
    official signal for beginning of a tight money
    situation.

13
Open Market Operations (OMOs)
  • OMOs involve buying (outright or temporary) and
    selling of govt securities by the central bank,
    from or to the public and banks.
  • RBI when purchases securities, pays the amount of
    money by crediting the reserve deposit account of
    the sellers bank, which in turn credits the
    sellers deposit account in that bank.

14
RBI Annual Policy Statement for 2006-07 April
18, 2006
  • Highlights
  • Focus on credit quality and financial market
    conditions for maintaining macroeconomic, in
    particular, financial stability.
  • Monetary and interest rate environment enabling
    growth momentum consistent with price stability.
  • Bank Rate, Reverse Repo Rate, Repo Rate and Cash
    Reserve Ratio kept unchanged.
  • GDP growth projection for 2006-07 at 7.5-8.0 per
    cent.
  • Inflation to be contained within 5.0-5.5 per cent
    during 2006-07.
  • M3 projected to expand by around 15.0 per cent
    for 2006-07.
  • In normal circumstances, the policy preference
    would be for maintaining a lower order of money
    supply growth in 2006-07.
  • Deposits projected to grow by around Rs.3,30,000
    crore for 2006-07.

15
  • Adjusted non-food credit projected to increase by
    around 20 per cent, implying a calibrated
    deceleration from a growth of around 30 per cent
    ruling currently.
  • Appropriate liquidity to be maintained to meet
    legitimate credit requirements, consistent with
    price and financial stability.
  • Primary Dealers to be permitted to diversify
    their activities.
  • Barring the emergence of any adverse and
    unexpected developments in various sectors of the
    economy and keeping in view the current
    assessment of the economy including the outlook
    for inflation, the overall stance of monetary
    policy at this juncture will be
  • to ensure a monetary and interest rate
    environment that enables continuation of the
    growth momentum consistent with price stability
    while being in readiness to act in a timely and
    prompt manner on any signs of evolving
    circumstances impinging on inflation
    expectations.
  • to focus on credit quality and financial market
    conditions to support export and investment
    demand in the economy for maintaining
    macroeconomic, in particular, financial
    stability.
  • to respond swiftly to evolving global
    developments.

16
Annual Policy Statement 2006-07
  • The Statement consists of two parts Part I.
    Annual Statement on Monetary Policy for
  • the Year 2006-07 and Part II. Annual Statement
    on Developmental and Regulatory
  • Policies for the Year 2006-07.
  • PART I
  • Domestic Developments
  • The upward revision of real GDP growth to 7.5-8.0
    per cent in the Third Quarter Review of January
    24, 2006 turned out to be in alignment with the
    advance estimate of the Central Statistical
    Organisation at 8.1 per cent for 2005-06, up from
    7.5 per cent in the previous year.
  • Inflation, measured by variations in the
    wholesale price index (WPI) on a year-on-year
    basis, was 4.0 per cent at end-March 2006 and
    3.5 per cent as on April 1, 2006 after receding
    from a peak of 6.0 per cent on April 23, 2005.
  • The average price of the Indian basket of
    international crude oil ruled at around US 60.1
    per barrel in January-March, 2006 higher by 30.2
    per cent than a year ago.
  • The year-on-year M3 growth was 16.2 per cent
    (Rs.3,77,238 crore) in 2005-06 (March 31, 2006
    over April 1, 2005) as compared with 12.1 per
    cent (Rs.2,42,260 crore), net of conversion, in
    the previous year.

17
  • Excluding the end-March effect, the year-on-year
    increase in aggregate deposits during 2005-06
    (March 31, 2006 over April 1, 2005) was 16.9 per
    cent (Rs.3,02,534 crore) as against an increase
    of 12.8 per cent (Rs.1,92,269 crore), net of
    conversion, in the previous year.
  • Excluding the end-March build-up, the
    year-on-year increase in non-food bank credit
    during 2005-06 (over April 1, 2005) was 30.8 per
    cent (Rs.3,42,493 crore) on top of 27.5 per cent
    (Rs.2,21,602 crore), net of conversion, a year
    ago.
  • Financial markets remained generally stable
    during 2005-06 although interest rates firmed up
    in all segments and the uncollateralised
    overnight call market experienced persistent
    tightness during the last quarter of the year.
  • A noteworthy and desirable development during the
    year was the substantial migration of money
    market activity from the uncollateralised call
    money segment to the collateralised market repo
    and collateralised borrowing and lending
    obligations (CBLO) markets.
  • The total overhang of liquidity as reflected in
    outstandings under the Liquidity Adjustment
    Facility (LAF), the Market Stabilisation Scheme
    (MSS) and surplus cash balances of the Central
    Government taken together declined from an
    average of Rs.1,14,192 crore in March 2005 to
    Rs.74,334 crore in March 2006.
  • For the first time since 1969, investment by SCBs
    in Government and other approved securities
    declined by Rs.11,576 crore in 2005-06 in
    contrast to an increase of Rs.49,373 crore, net
    of conversion, in 2004-05.
  • During 2005-06, the Central Governments net
    market borrowings at Rs.95,370 crore were 86.5
    per cent of the budgeted amount of Rs.1,10,291
    crore and gross market borrowings of Rs.1,58,000
    crore were 88.5 per cent of the budgeted amount
    of Rs.1,78,487 crore.

18
External Developments
  • In US dollar terms, merchandise exports increased
    by 24.7 per cent during 2005-06 as compared with
    26.4 per cent in the previous year. Imports
    showed an increase of 31.5 per cent as compared
    with 36.4 per cent in the previous year.
  • While the increase in oil imports was higher at
    46.8 per cent as compared with 45.2 per cent in
    the previous year, non-oil imports showed an
    increase of 25.6 per cent as compared with 33.3
    per cent in the previous year.
  • Indias foreign exchange reserves increased by US
    10.1 billion from US 141.5 billion at
    end-March 2005 to US 151.6 billion by end-March
    2006.
  • The foreign exchange market remained orderly in
    2005-06 with the exchange rate exhibiting two-way
    movements. During 2005-06, the rupee depreciated
    by 1.9 per cent against the US dollar but
    appreciated by 4.4 per cent against the euro, by
    5.5 per cent against the pound sterling and by
    7.5 per cent against Japanese yen.

19
Global Developments
  • Global growth moderated in the fourth quarter
    (Q4) of 2005, but is estimated to have risen to
    4.8 per cent by the International Monetary Fund
    (IMF) for the full year in view of the
    broad-based expansion in economic activity.
  • Though price stability has been maintained in
    major industrial countries in the face of the oil
    shock, risks loom large in the form of lagged
    second order effects of oil price increases,
    geopolitical tensions, the probability of
    disorderly and rapid adjustment of current
    account imbalances and the risks emanating from
    the housing market, particularly when the cycle
    turns down.

20
Overall Assessment
  • Macroeconomic and financial conditions have
    evolved as stronger than expected.
  • Inflation has been contained well within the
    projected range as reflected in the relative
    stability of long-term interest rates.
  • There are indications of improvement in the
    fiscal situation and the return to the path of
    correction set by the Fiscal Responsibility and
    Budget Management Rules.
  • Global growth has also exhibited considerable
    resilience.
  • Downside risks to the economic outlook
    internationally continue in the form high and
    volatile oil prices, geo-political tensions and
    supply shocks, elevated asset prices, global
    imbalances and tightening of monetary policy
    globally.
  • In the domestic economy, non-food credit growth,
    deposit growth and money supply growth were
    higher than the projections.
  • Asset prices have registered a substantial
    increase.
  • Ensuring credit quality and increasing the pace
    of investment in infrastructure is important.

21
Stance of Monetary Policy
  • GDP growth may be placed in the range of 7.5-8.0
    per cent during 2006-07 assuming accelerated
    growth in agriculture under normal monsoon
    conditions and barring domestic or external
    shocks.
  • The policy endeavour would be to contain the
    year-on-year inflation rate for 2006-07 in the
    range of 5.0-5.5 per cent.
  • The expansion in M3 is projected at around 15.0
    per cent for 2006-07 even though the policy
    preference would be for maintaining a lower order
    of money supply growth in 2006-07.
  • The growth in aggregate deposits is projected at
    around Rs.3,30,000 crore in 2006-07.
  • Year-on-year adjusted non-food credit is expected
    to increase by around 20 per cent, a calibrated
    deceleration from a growth of above 30 per cent
    ruling currently.
  • It is necessary to keep in view the dominance of
    domestic factors as in the past but to assign
    more weight to global factors than before while
    formulating the policy stance.

22
  • The Reserve Bank will continue to ensure that
    appropriate liquidity is maintained in the system
    so that all legitimate requirements of credit are
    met, consistent with the objective of price and
    financial stability. Towards this end, RBI will
    continue with its policy of active demand
    management of liquidity through OMO including
    MSS, LAF and CRR, and using all the policy
    instruments at its disposal flexibly, as and when
    the situation warrants.
  • Barring the emergence of any adverse and
    unexpected developments in various sectors of the
    economy and keeping in view the current
    assessment of the economy including the outlook
    for inflation, the overall stance of monetary
    policy at this juncture will be
  • to ensure a monetary and interest rate
    environment that enables continuation of the
    growth momentum consistent with price stability
    while being in readiness to act in a timely and
    prompt manner on any signs of evolving
    circumstances impinging on inflation
    expectations.
  • to focus on credit quality and financial market
    conditions to support export and investment
    demand in the economy for maintaining
    macroeconomic, in particular, financial
    stability.
  • to respond swiftly to evolving global
    developments.

23
Monetary Measures
  • As on 18th April 2006
  • Bank Rate kept unchanged at 6.0 per cent.
  • Reverse Repo Rate and Repo Rate kept unchanged at
    5.5 per cent
  • and 6.5 per cent, respectively.
  • Cash reserve ratio (CRR) kept unchanged at 5.0
    per cent.
  • As on 15th Oct 2006
  • Policy Rates
  • Bank Rate 6
  • Repo Rate 7
  • Reverse Repo Rate 6
  • Reserve Ratios
  • CRR 5
  • SLR 25

24
(No Transcript)
25
Growth of M3 and Differential Contribution of
Components
  • Source RBI-Macroeconomic and Monetary
    Developments Third Quarter Review 2005-06

26
RBI Annual Policy Statement for 2005-06 April
28, 2005
  • The Statement consists of two parts
  • Part I. Annual Statement on Monetary Policy for
    the Year 2005-06 and
  • Part II. Annual Statement on Developmental and
    Regulatory Policies for the Year 2005-06.
  • Review of macroeconomic and monetary developments
    was issued, a day in advance, as a supplement to
    Part I
  • First Quarter Review in July
  • Mid-term Review in October,
  • Third Quarter Review in January

27
Domestic Developments
  • During 2005-06 real GDP growth projected at
    around 7.0
  • inflation rate in a range of 5.0-5.5 and
  • Money supply (M3) growth rate at 14.5
  • For 2004-05 GDP growth placed at 6.9
  • Inflation rate stood at 5.0 at end-March
    2005.
  • M3 increased by 12.8 .
  • RBIs foreign currency assets increased by
    Rs.1,15,044 Crore.
  • The expansionary impact of foreign currency
    assets was neutralised to a large extent by
    market stabilisation scheme (MSS) in conjunction
    with reverse repo operations under liquidity
    adjustment facility (LAF).

28
  • Non-food credit increased by 26.5 per cent.
  • Total flow of funds from Scheduled Commercial
    Banks increased by 23.6 per cent exceeding the
    growth of 19.0 per cent anticipated in October
    2004.
  • Combined market borrowings of the Centre and
    States were lower.
  • During 2004-05, financial markets remained
    generally stable.
  • While interest rates in money and government
    securities markets rose intra-year, they
    stabilised in the later part of the year, albeit
    at higher levels.
  • While the share of sub-PLR lending rose, lending
    rates remained stable.

29
External Developments
  • Exports in US dollar terms increased by 27.1 per
    cent while Imports by 36.4 per cent leading to
    widening of trade deficit to US 23.8 billion
    during 2004-05 (upto February).
  • During 2004-05 (April-December), current account
    showed a deficit of US 7.4 billion as against a
    surplus of US 4.8 billion in the corresponding
    period of the previous year,
  • Net accretion to foreign exchange reserves,
    including valuation changes, amounted to US
    18.2 billion during April-December 2004.
  • Indian foreign exchange market witnessed orderly
    condition with rupee exhibiting two-way
    movements.

30
Global Developments
  • Though world economy is projected to slow to 4.3
    per cent in 2005, expansion is above trend.
  • Oil price appears to have larger permanent
    component.
  • Risk to growth arises from current account and
    fiscal imbalances necessitating exchange rate
    adjustment.
  • The global financial system is stable but risks
    have increased.

31
Stance of Monetary Policy
  • Overall stance of monetary policy for the year
    2005-06 is
  • (i) Provision of appropriate liquidity to meet
    credit growth and support investment and export
    demand in the economy while placing equal
    emphasis on price stability,
  • (ii) Consistent with the above, to pursue an
    interest rate environment that is conducive to
    macroeconomic and price stability, and
    maintaining the momentum of growth, and
  • (iii) To consider measures in a calibrated
    manner, in response to evolving circumstances
    with a view to stabilising inflationary
    expectations.

32
Monetary Measures 2005-06
  • Bank Rate kept unchanged at 6.0 per cent
  • Reverse Repo Rate increased by 25 basis points to
    5.0 per cent.
  • Cash Reserve Ratio kept unchanged at 5.0 per
    cent.

33
Developmental and Regulatory Policies
  • Status quo on the administered interest rates on
  • (i) savings deposit accounts,
  • (ii) non-resident Indian (NRI) deposits,
  • (iii) small loans up to Rs.2 lakh and
  • (iv) export credit.
  • Effective June 11, 2005, non-bank participants
    would be allowed to lend up to 10 per cent of
    their average daily lending in call/notice money
    market during 2000-01.
  • Effective August 6, 2005, non-bank participants
    would be completely phased out from the
    call/notice money market.
  • Consolidation of debt and building up of large
    liquid securities in consultation with the
    Government while continuing the programme of
    reissuances.
  • Post-FRBM, functional separation between debt
    management and monetary operations within RBI.
    For this purpose, RBI will have discussions with
    market players on the modalities and procedures
    of market operations.
  • Following the recommendation of the Twelfth
    Finance Commission, RBI would facilitate the
    smooth transition of States' market borrowing
    through consultation with the Central and the
    state governments.

34
  • To raise the ceiling of overseas investment by
    Indian entities in overseas joint ventures and/or
    wholly owned subsidiaries from 100 per cent to
    200 per cent of their net worth under the
    automatic route.
  • To accord general permission to Authorised
    Dealers (ADs) to open foreign currency accounts
    of the project offices set up in India by foreign
    companies and operate the accounts flexibly.
  • RBI has set up an Expert Group to formulate
    strategy for increasing investment in
    agriculture.
  • Survey to assess customer satisfaction on credit
    delivery in rural areas by banks-- proposed.
  • It is proposed to increase the limit on loans to
    farmers through produce marketing scheme from
    Rs.5 lakh to Rs.10 lakh under priority sector
    lending.
  • Banks urged to continue their efforts to step up
    credit to agriculture.
  • RBI has enabled NGOs to access External
    Commercial Borrowings up to US 5 million

35
  • The Reserve Bank is reviewing all its existing
    guidelines on financing small scale sector, debt
    restructuring, nursing of sick units, etc with a
    view to rationalising, consolidating and
    liberalising them.
  • Under a scheme to be drawn up by the RBI, banks
    will be encouraged to establish mechanisms
    between their branches and branches of SIDBI for
    enhancing credit to small industries.
  • The Reserve Bank will explore modalities to meet
    the growing financial needs of medium
    enterprises.
  • RBI is in the process of reviewing the
    performance of RRBs (Regional rural Banks) and
    exploring restructuring of RRBs.

36
  • To issue guidelines on merger and amalgamation
    between private sector banks and with NBFCs.
  • The principles underlying these guidelines would
    also be applicable as appropriate to public
    sector banks, subject to relevant legislation.
  • Banks are urged to refocus on deposit
    mobilisation and empower the depositors, by
    providing wider access and better quality of
    banking services.
  • RBI will implement policies to encourage banks
    which provide extensive services while
    disincentivising those which are not responsive
    to the banking needs of the community, including
    the underprivileged.

37
  • To set up an independent Banking Codes and
    Standards Board of India on the model of the
    mechanism in the UK in order to ensure that
    comprehensive code of conduct for fair treatment
    of customers are evolved and adhered to.
  • To issue appropriate guidelines to banks to
    ensure transparency and disclosure of information
    by the card issuing banks and customer rights
    protection including facilitating enforcement of
    such rights.
  • In order to maintain consistency and harmony with
    international standards, banks advised to adopt
    Standardised Approach for credit risk and Basic
    Indicator Approach for operational risk with
    effect from March 31, 2007.

38
  • The Reserve Bank would enter into bank-wise
    dialogues relating to ownership and governance in
    private banks to ensure a time-bound framework
    for compliance.
  • On the basis of the feedback, the draft
    guidelines on securitisation of standard assets
    would be finalised.
  • The guidelines on sale/purchase of non-performing
    assets would be finalised on the basis of
    feedback.
  • The Report of the Working Group on Conflicts of
    Interest in the Indian Financial Services Sector
    (Chairman Shri D.M. Satwalekar) would be put in
    the public domain for wider dissemination before
    recommending for adoption.
  • The Vision Document for Payment and Settlement
    Systems indicating action points would be placed
    in the public domain for wider dissemination.
  • A Board for Regulation and Supervision of Payment
    and Settlement Systems (BPSS) was constituted as
    a Committee of the Central Board of RBI

39
  • The Reserve Bank proposes to operationalise
    National Electronic Funds Transfer (NEFT) System
    and NEFT (Extended).
  • In order to facilitate the technology plans of
    the financial sector, RBI is preparing a
    Financial Sector Technology Vision Document which
    would be put in the public domain.
  • RBI is examining the issue of smooth flow of bank
    finance to NBFCs.
  • The Standing Committee on Procedures and
    Performance Audit on Public Services (Chairman
    S.S. Tarapore) constituted by RBI has ceased its
    operations in March 2005.
  • In order to facilitate regular monitoring, Ad hoc
    Committees in banks have been converted to
    permanent Standing Committees on Customer Service.

40
Edmund Phelps' Economic Theory on Unemployment
and Inflation
  • Edmund Phelps, the 2006 Nobel Prize winner in
    Economics helped establish the relationship
    between unemployment and inflationand what the
    Fed can and can't do about jobs
  • In the 1960s, along with famed Chicago economist
    Milton Friedman, Phelps helped create the concept
    caled the "natural rate of unemployment or NRU."
  • NRU is also called the "long-run rate of
    unemployment" or the "non-accelerating inflation
    rate of unemployment or NAIRU ".
  • What the natural or long-run rate means is this
    If unemployment is lower than its "natural rate,"
    then inflation tends to increase. If unemployment
    is greater than the natural rate, then inflation
    tends to fall.

41
Why Phelps' Theory was important?
  • Before Phelps and Friedman, many macroeconomists
    believed that it was possible to permanently
    lower the unemployment rate if the Federal
    Reserve was willing to cut rates and accept more
    inflation.
  • But Phelps and Friedman, in separate research,
    argued that the stimulative effect of low rates
    would eventually wear off and unemployment would
    rise back to the natural rate, leaving behind a
    higher inflation rate.
  • An important implication of Phelps's work is that
    the long-term rate of unemployment cannot be
    changed by monetary or fiscal policy.
  • While the Fed can fight recessions by cutting
    interest rates, it can't expect to permanently
    boost employment once the recession is over.

42
Does Phelps' work still matter today?
  • Very much so. Despite more than 30 years of
    subsequent research, most macro forecasting
    models are still built around some variant of the
    natural rate of unemployment.
  • Certainly the two leading private forecasters,
    St.Louis-based Macroeconomic Advisers and Global
    Insight of Waltham, Mass., rely on Phelps-type
    equations in their models.
  • "In the end, we keep coming back to what he's
    done," says Nariman Behravesh, chief economist of
    Global Insight.

43
Contd
  • The conduct of monetary policy today is also
    influenced by Phelps' work.
  • Central bankers have given up on the idea that
    interest-rate changes can influence the long-run
    rate of unemployment. Instead, they concentrate
    on controlling inflation.
  • One tool If the unemployment rate is below its
    long-run level, then the Fed is more likely to
    raise interest rates.
  • The US Bureau of Labor Statistics just reported
    that the unemployment rate was 4.6 in
    September2006.
  • Joel Prakken, chairman of Macroeconomic Advisers,
    estimates that the natural rate is around 5.25,
    though it could be as much as a half-point higher
    or lower. Behravesh pegs it somewhat lower,
    perhaps between 4.5 and 5.
  • In either case, unemployment has fallen close to
    the level that would create an acceleration of
    wage growth. That would mean the Fed might be
    more likely to raise rates.

44
Why is the Nobel committee just honoring Phelps
now?
  • By reaching back to Phelps, the Nobel prize
    committee is tacitly acknowledging that old wine
    still may be the best.
  • N. Greg Mankiw, a Harvard professor and former
    chairman of the Council of Economic Advisers,
    recently wrote "The sad truth is that the
    macroeconomic research of the past three decades
    has had only minor impact on the practical
    analysis of monetary or fiscal policy."
  • Adds Prakken "The neoclassical paradigm that
    evolved in the 1960s is still the best organizing
    framework to think about the economy."
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