Political economy a reality for central bankers, says Rajan

Washington :Terming politics an important force in determining tactics of economic policymakers, RBI Governor Raghuram Rajan has said the framework in India allows the central bank a “protection” to some extent and its policy has been to take the heat away from the “political economy”.

Rajan said RBI’s policy process 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 are doing is disinflation without worrying too much about distribution’.

“To some extent, that framework allows us protection”.

Addressing the famous Jackson Hole economic symposium of the Kansas City Federal Reserve in Wyoming, Rajan said politics and history both have been important forces in determining the economic policymakers’ goals and tactics globally.

“Political economy is not an aberration, but a reality that should be accounted for in our policy analysis,” he said.

Interestingly, it is the same summit where Rajan had once famously presented a paper that talked about an imminent global financial crisis, which eventually hit the world markets in 2007-08. Rajan was IMF’s chief economist when he made that famous ‘prediction’.

At this year’s symposium, which ended last night, Rajan said when it comes to the modern central banks’ focus on targeting inflation, it is the “history and political economy” that determines which side of the inflation band needs to be emphasised.

It has been argued that the US was focussing on costs attached to low inflation or deflation because of the bankruptcies in the 1920s and 1930s, while the Germany’s experience with high inflation in the 1920s explains their focus on protection against high inflation.

Talking about Japan’s aging population, Rajan wondered whether the political power of the elderly were the reason for the country’s tolerance for deflation.

He was speaking at a panel discussion on global inflation dynamics. Others on the panel included Federal Reserve Vice Chairman Stanley Fischer, Bank of England Governor Mark Carney and European Central Bank Vice President Vtor Constancio.

Rajan said that unlike most of the advanced economies, inflation has remained very high in recent years and he was trying to bring down the high inflation rate while addressing the issues like high interest costs and currency fluctuations that were hurting manufacturers.

While most of the speakers at the symposium talked about major central banks being focused on bringing inflation up, Rajan said the lack of price pressure was not a universal problem.

“Unlike our other panelists, I have the problem of dealing with the traditional central banker problem of high inflation and the task of bringing it down. We are disinflating in a world of very low global inflation and that has problems.”