India's Rajan: 'Political Economy' Important But Quiet Issue for Central Bankers
August 29 2015 - 3:51PM
Dow Jones News
By Ben Leubsdorf
JACKSON HOLE, Wyo.--The role of politics and history is a
little-discussed but important force in determining the goals and
tactics of economic policy makers, Reserve Bank of India Gov.
Raghuram Rajan said Saturday.
For instance, when it comes to modern central banks' focus on
targeting inflation, "which side of the inflation band is
emphasized stems from history and political economy," Mr. Rajan
said at the Federal Reserve Bank of Kansas City's annual economic
symposium.
He said some have argued the U.S. focus on the costs of low
inflation or deflation reflects in part farm and business
bankruptcies in the 1920s and 1930s, while the German experience
with very high inflation in the 1920s "would explain the focus on
the upper bound, that is, protecting against high inflation." He
also asked if Japan's aging population and "the political power of
the elderly" might help explain the country's tolerance for
deflation.
Mr. Rajan said that "political economy is not an aberration, but
a reality that should be accounted for in our policy analysis."
Mr. Rajan spoke in Jackson Hole on Saturday on a panel about
global inflation dynamics with Federal Reserve Vice Chairman
Stanley Fischer, Bank of England Gov. Mark Carney and European
Central Bank Vice President Vítor Constâncio.
Unlike his colleagues in advanced economies, where inflation has
remained stubbornly sluggish in recent years, Mr. Rajan noted that
he is trying to bring down India's high inflation rate while
navigating complications like manufacturers who are hurt by higher
interest rates and a stronger currency.
The Reserve Bank of India's policy process, among other things,
involves "trying to take the heat away from the political economy
and put it on frameworks, technical models, projections, et cetera,
and say, 'What we're doing is disinflation without worrying too
much about distribution, '" he said. "To some extent, that
framework allows us protection."
Write to Ben Leubsdorf at ben.leubsdorf@wsj.com
(END) Dow Jones Newswires
August 29, 2015 15:36 ET (19:36 GMT)
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