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GROUP MEMBERS:
Ruchika Damani (222), Vrishali Bagree (237), Aditi Tibrewal (239), Rishabh Maheshwary (244), Kashmira Gupta (259), Radhika Bhatter (287), Nishtha Agarwal (288), Shruti Bhandari (289), Sudarshan Bagaria (290), Vijay Daniel Anthony (21293) Under the Guidance of Dr. P. P. Ghosh ( St. Xaviers College, Kolkata)
INTRODUCTION
Monetary policy is an economic strategy of the government in deciding the contraction and expansion of money supply in the economy or targeting interest rates. Our aim is to study the monetary policies of different countries, how they function and how they impact the economy as a whole The tools employed by Central Bank are: 1. Buying or selling national debt 2. Changing credit restrictions 3. Changing interest rates by changing reserve requirements
In India, the RBI has always aimed at the controlled expansion of bank credit and money supply. The objectives of monetary policy are: 1. 2. 3. 4. 5. Rapid Economic Growth Price stability Exchange rate stability Balance of payment equilibrium Full employment
LITERATURE REVIEW
Several works have been carried out with regard to input output integrated models in developing countries, some of which are mentioned below : Bangladesh (Chowdhury, 1983, 1984) : The objective is to analyze the working of the Bangladesh economy for the period 1959-60 to 1980-81. Chowdhury argues strongly in favor of using this type of model. Sri Lanka (Ghosh, 2010) : The objective is to analyze the structure and growth of the economy with special reference to Linkage and multiplier analysis in IO framework in order to analyze structural change Estimation of macro model, GNP by value added. MIMFSE, Egypt (Elkhafif, 1997) : the objective of the macro econometric and input output model is for forecasting and stimulation of the Egyptian economy. Nigeria (Ajakaiye, 1986) : the objective of building an integrated macroeconomic and input output model is to stimulate employment and manpower implications for macroeconomic policies in Nigeria. Sectoral level study have been carried out even with regard to developing countries like Nepal, Brazil, Lithuania and Mexico.
..(ii)
In matrix notation, we have: V =x = L f (using the Leontief Solution) ..(iii) The Final Demand f is estimated from a Macro-econometric Model
MONETARY BLOCK
These econometric estimates are checked for consistency with the macro model and fed into an INPUT-OUTPUT SUBMODEL
xi = jaijxj + Ci + Ii + Ei + Fi
Total quantities are given by
L= j lj; Q= j qj
Non-Labor Income from industry j
f1,f2>0, f3<0
f1,f2>0, f3<0
Home Price and Export Price Functions, Wage Bill and Tax Functions are given as:
pi = f (pi,-1, ki, ddi , pmi); f1,f2,f3,f4>0; where ki = li/xi and ddi is % industrial capacity utilization
The above graph shows the fluctuations in the overall GDP inflation rate in India. Inflation was at peak level during 1991-92 at around 13.8%. In the subsequent years the fluctuation in the GDP inflation occurred at a modest scale. We now look into the sectoral wise studies divided into 3 phases vis 1989-1990 to 1995-1996 1996-1997 to 2003-2004 2004-2005 to 2008-2009
10
12
14
Industrial inflation
1992-93
1993-94 1994-95 1995-96 1996-97 1997-98
Industrial Inflation
Time
1998-99 1999-00 2000-01 2001-02 2002-03
2003-04
2004-05 2005-06 2006-07 2007-08 2008-09
Industrial Inflation
Reasons for rise in agricultural inflation : Supply and demand imbalances in essential items Tight BOP position Erratic monsoons and cost push inflation Reasons for fall in agricultural inflation : Restrictions on imports and hence increase in domestic supply Reduction in import duties for pulses and edible oil Good monsoons leading to bumper crops
Reasons for rise in industrial inflation : Shortage of imported raw materials and rise in export demand for metals etc Cost push inflation due to rise in fuel price and distribution costs Infrastructural bottlenecks and unutilized capacity constraints Reasons for fall in industrial inflation : Reduction in customs and export duties Liberalized policies led to relaxation of import restrictions Lowering of prices of essential and primary articles led to lowering of prices of manufactured goods
Reasons for rise in agricultural inflation : Improved terms of trade for agriculture Increased investment in fertilizers and other agricultural inputs Agricultural exports increased Reasons for fall in agricultural inflation : Higher production and consequent increased availability in the market led to higher domestic prices compared to international prices Targeted Public Distribution System replaced the erstwhile PDS Increase in the inflow of institutional rural credit
Reasons for rise in industrial inflation : Slowdown of industrial growth Lack of domestic demand for intermediate goods, low inventory demand for capital goods Excess capacity in some sectors Reasons for fall in industrial inflation : Fall in the imports of capital goods The higher growth of basic goods, intermediate goods and consumer durables Rise in Business Confidence Index (BCI), better corporate performance and the bullish sentiments in stock markets
Reasons for rise in agricultural inflation : Demand supply imbalances on food grains Erratic monsoons Agricultural products like cereals and pulses, coffee ,spices and condiments experienced higher prices Reasons for fall in agricultural inflation : Rise in agricultural credit Reduction in excise and custom duties
Reasons for rise in industrial inflation : Rise in price of petroleum Decelerated growth of the manufacturing sector Rise in global demand Reasons for fall in industrial inflation : Higher rate of growth of industrial sector Coal and mining recorded lower inflation rate Fall in exports followed by a decline in domestic demand
We bring into light the structural view of Prof. Mihir Rakshit to show how inflation is more dependent on structural factors than on the money supply. The study shows that macro economic factors like growth rate of GDP, narrow money and broad money do not have a statistically significant effect on inflation
The findings highlight the role of sectoral factors in driving them. The fuel prices have a greater impact on core as well as headline WPI as compared to impact of food prices.
HOW WERE THE POLICIES UNDERTAKEN BY THE RBI DIFFERENT FROM THE OTHERS?
There was no dilution of collateral standards that were mostly Government securities incase of India. The balance sheet of RBI was more or less stable in spite of large liquidity expansion. Better sequencing of monetary and liquidity measures was enabled due to greater availability of multiple instruments. Financial stability was enhanced with the use of pro cyclical and counter cyclical regulations ahead of the global crisis.
CONCLUSION
The correlation coefficient between the rate of growth money supply (broad money) and agricultural inflation is 0.25064092.
The correlation coefficient between the rate of growth of money supply and industrial inflation is 0.14347801.
The correlation coefficient between the rate of growth of money supply and service inflation is 0.18298621
Thus we conclude that at the sector levels there maybe various structural influences or on the endogenous prices and quantities in an economic system. The interplay of such sector level relations consistent with a overall macroeconomic framework would be more useful for analyzing the performance of the economy and adopting appropriate policy measures. In this project we have carried out a pilot survey of inflationary trends in the agricultural and industrial sector that reveals the importance of structural and inter-sector factors in determining inflation at a disaggregated level. This lends credibility to the case for building an integrated input output and macro model for the Indian economy.
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