Saturday, June 07, 2008
We have seen this movie before
In the 1970s, the oil shock kicked up inflation all over the world. At the time, monetary policy was poorly structured the world over, and governments did all kinds of silly things in combating inflation. This messy combination of policies helped trigger of the painful period of `stagflation'. For economists, though, it was a great period in that it triggered off new thinking about what monetary policy should do. These new ideas have reshaped monetary policy in all high-income countries. New ideas of monetary policy have helped usher in the `great moderation' where recessions are shallower and shorter. I have an article We have seen this movie before in Financial Express today where I interpret India's problems with monetary policy and inflation from this point of view.