Cost and benefit of disinflation policy in India

Abstract

The Reserve Bank of India’s monetary policy stance is based on assertions that there is no trade-off between inflation and growth and that disinflation will result in more growth. This note examines recent empirical evidence on the direction of causality for growth and infl ation, and the short-run costs and long-run benefits of a deliberate policy of disinflation. There is no support for the first assertion because a regular trade-off does exist in India, imposing substantial short-run costs for deliberate disinflation. There is strong evidence for causality from growth to inflation, but the reverse cannot be ruled out. Under such conditions, the RBI should hold nominal growth of money supply and allow supply-side policies by the government to bring down inflation. - See more at: http://www.epw.in/journal/2014/28/notes/cost-and-benefit-disinflation-policy-india.html#sthash.v7YR58s0.dpuf