International Comparisons of Living Standards by Equivalent Incomes, Marc Fleurbaey & Guillaume Gaulier, January 2007: www.cepii.fr/anglaisgraph/workpap/pdf/2007/wp07-03.pdf.
Low interest rates bring the benefits of broad growth that is widely distributed in SMEs and entrepreneurial ventures (provided funding is accessible, not tucked away in government bonds or restricted to blue-chips who don’t need it), as well as in larger enterprises. The resulting lower costs sweep away many ills motivated by high interest rates, e.g., excess liquidity, the Yen carry trade, much of today’s external commercial borrowings (the reverse-rupee-carry-trade), and deals like Japanese leveraged leases (a structure arising from low interest rates with low tax rates), which will disappear with the dismantling of their rationale. Not only will low rates cut off a root cause of excess liquidity, they will help to move the locus of transactions to a local ambit, enabling the development of financial depth and higher-order capabilities in local markets.
Living standards are measured in various other ways, such as the UN’s Index of Human Development, Osberg & Sharpe’s Index of Economic Well-being, or Bhutan’s Gross National Happiness. Alternatively, GDP per capita can be adjusted to compensate for non-income attributes of a society’s choosing, such as better healthcare, less unemployment or pollution, or more leisure, to arrive at an adjusted “equivalent income”, by determining how much a population is willing to pay for a reference level of a non-income dimension.
Source: International Comparisons of Living Standards by Equivalent Incomes, Marc Fleurbaey & Guillaume Gaulier, January 2007: http://www.cepii.fr/anglaisgraph/workpap/pdf/2007/wp07-03.pdf
What should be our “acceptable” inflation rate? The risk in mentioning inflation is that the high priests of one persuasion or the other hijack all discourse, with knee-jerk reactions from anti-inflationary ideologues as well as proponents of inflation-tolerance. Arguments for both sides are entrenched in ideology, preempting understanding and multidisciplinary action for the practical management of such problems.
Consider a question I will address in my next article: what inflation rate should we—and the government and the RBI—wish for?
Before fielding Sukhamoy Chakravarty’s proposed 4 per cent, then RBI Governor Rangarajan’s 5-6 per cent, and FM Chidambaram’s 4-4.5 per cent, please consider:
- At a time of high growth, why nurture high “acceptable inflation”, i.e. expectations of rising prices? Why not 1-2 per cent?
- Do facts contradict the conclusion that high prices follow high interest rates (Thomas Tooke)?**
- How desirable—imperative?—is it to coordinate fiscal and monetary policy (and public-private initiatives) to achieve low interest rates and inflation in an emerging economy?
* See The Economist, May 3, 2007: ‘Conquistadors On The Beach’ and ‘Plain Sailing No Longer’.
** On Interest and Profit: Thomas Tooke’s major legacy to economics, Matthew Smith:http://cpe.oxfordjournals.org/cgi/content/short/25/1/1.