Article;
http://economictimes.indiatimes.com/news/economy/indicators/inflation-at-10-month-high-dampens-rate-cut-hopes/articleshow/16819566.cms
Comment;
Before the RBI the question is not just inflation… it is actually a trade-off between inflation and unemployment. If inflation is high the central bank chooses a lower level of employment by raising interest rate. On the other hand, if unemployment is high it chooses a higher level of inflation by lowering interest rate. To sum up, a central banks’ job is not just keeping check on inflation but to ensure full employment, as well. Just to note, full employment is established before 100% employment, at 95% employment or 5% frictional unemployment.
Recently i read at many places that in 2012 unemployment rate fell to 3.8%. I wonder, with many, that how with a high interest rate, around 8%, and with everybody keeping their hands-off of investment unemployment rate fell to 3.8%? If it has and is true… it is a sign of overheating of the economy and, now, i do not wonder, anymore, why inflation is persistent. Anyways, at other places, i found unemployment rate for the year 2011 at 9.8%. On the basis of the 2011 data even if i guess that what could be the unemployment rate for year 2012, i can’t guess less than 8% because interest rates remain almost same with 50 basis point cut in repo rate by the RBI. This figure is 3% above than our frictional unemployment rate of 5%. In one situation, we can not lower the interest rate, in the other, we need to reduce unemployment rate by lowering interest rate, choosing a high inflation target. I’m confused which data the RBI will find true to choose its course…
http://economictimes.indiatimes.com/news/economy/indicators/inflation-at-10-month-high-dampens-rate-cut-hopes/articleshow/16819566.cms
Comment;
Before the RBI the question is not just inflation… it is actually a trade-off between inflation and unemployment. If inflation is high the central bank chooses a lower level of employment by raising interest rate. On the other hand, if unemployment is high it chooses a higher level of inflation by lowering interest rate. To sum up, a central banks’ job is not just keeping check on inflation but to ensure full employment, as well. Just to note, full employment is established before 100% employment, at 95% employment or 5% frictional unemployment.
Recently i read at many places that in 2012 unemployment rate fell to 3.8%. I wonder, with many, that how with a high interest rate, around 8%, and with everybody keeping their hands-off of investment unemployment rate fell to 3.8%? If it has and is true… it is a sign of overheating of the economy and, now, i do not wonder, anymore, why inflation is persistent. Anyways, at other places, i found unemployment rate for the year 2011 at 9.8%. On the basis of the 2011 data even if i guess that what could be the unemployment rate for year 2012, i can’t guess less than 8% because interest rates remain almost same with 50 basis point cut in repo rate by the RBI. This figure is 3% above than our frictional unemployment rate of 5%. In one situation, we can not lower the interest rate, in the other, we need to reduce unemployment rate by lowering interest rate, choosing a high inflation target. I’m confused which data the RBI will find true to choose its course…
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