Thursday, February 2, 2012

Policy Dilemma

Read an interesting article- Pays to be unpredictable in Foreign-exchange intervention: RBI

Here is an excerpt from the article:
"A central bank should have two policies, one strategic policy that is clearly laid out and stable, and another tactical policy that is more unpredictable, Subbarao said at an international conference organised by the RBI."

Seems like what Subbarao is suggesting is two have two policies. I agree with having a tactical policy which is a bit unpredictable. Having a long-term and a short-term policy brings with it a different kind of a dilemma. The dilemma of having a short-term policy that is in contradiction to the long-term policy. That is quite possible right? Ofcourse. For example, what if the US Fed announces now a 25 basis point increase in rates, having announced a long-term policy of maintaining low rates.

If you establish a long term policy, then you need to be true to that else the credibility of the Bank takes a hit. And ofcourse if you have a tactical policy which is inline with the long-term policy, then that makes the long-term policy kind of redundant.
My take is that the Bank should have a long-term inflation-linked goal (not policy)and announce short-term policies. I recently wrote a post on how Central Banks should have only short-term policies.

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