The Long-Term...

 In the long-run, all the countries are trying to increase their per capita income and living-standard according to the increase in productivity while maintaining their competitiveness with innovations because labour is relatively scarcer which might restrict the economy’s capacity absorb capital without increasing wages and the general price-level, as found in the general quantity theory of money... But, now there is also a special quantity theory of money observed in the developed countries that is not expected under the general conditions. In a major part of the developed world loose monetary policy has failed to increase prices as expected because demand might not increase due to excess of labour supply which may put a downward pressure on the wages and prices when interest rate or cost are also close to the zero lower bound. More money-supply has reduced the cost of capital with low wages increasing supply despite of low demand which has lowered the general price-level and interest rates pushing the economy at the zero lower bound or liquidity-trap for a longer period. At the zero lower bound cash hoarding increases, not necessarily in banks, because the value of money goes up in the face of lower prices, moreover everybody expects higher inflation in the future because it is the our basic observation that prices increase with time and the will to hold unlimited money also increase savings. The zero lower bound also trims the possibility of increasing investment and employment by reducing the borrowing cost or nominal interest rate, but the central banks are trying to reduce real interest rate and wages with inflation to incentivize the supply-side and profits which would also increase the relative international competitiveness to survive in the market-place. The central banks consciously or unconsciously are favouring the capitalist to reduce unemployment. Nonetheless, when real wages are going down demand too is likely to remain subdued resulting in lower growth rate...  The “long-run” to me exists all the time, which is the truth; it exists always, not subject to short-termism, what everybody does under the similar conditions. The difference between general and partial... 

Japan's higher long-run rates...

It is worth a thought that economic-models assume zero inflation in the long-run. Inflation is a short-run deviation from the equilibrium price-level. Economists think of the long-run as self-correcting. But when deciding long-run rates expected inflation plays an important role because the economy first consumes and then saves for the future; if they expect higher inflation based on the current situation they would also save more for the future too and more savings result in lower spending means lower demand and prices. Interest rate would go down. On the contrary, if they expect deflation based on the current condition they would save less-spend more which might increase demand and prices and interest rate. People expect higher interest rate if there is inflation because the monetary-policy would work to control inflation. Generally, prices and interest rate move in the same direction. Expected inflation would increase the long-run rates, higher than the short-run rates. The long-run rates are higher than the short –run rates which shows that depending on the economic –policy people expect inflation in the long-run which is opposite of what the economic models assume that inflation in the long-run would be lower or zero.  Keynes long ago accepted that labour and other factors of production might not be abundant but capital has no reason to be scarce since the central bank can print money to finance the economy. Gold-Standard off-load was a big move in that direction which was later used to print notes, buy foreign exchange and devalue to gain exports. Keynes foresees capital as not scarce in the long-run. Our zero interest-rate regimes in much of the developed world do support Keynes view that capital is not necessarily scarce. Higher long-run interest rate is against Keynes argument of lower interest rate.  

Higher wages may point overheating in the labour-market...

After increase in the hourly compensation to four-percent the case of a potential rate hike in the US looks close when the Fed meets in Dec. It shows higher wages and cost which may result in higher core inflation, a rise in wage, cost and price of manufactured products which reflect tightening in the labour market that the economy has achieved its potential and further monetary policy stance would be tightening of the capital market too because lose money-supply might increase demand for labour when the economy has reached full-employment and may result in wage cost and inflation which does reflect the reserve bank’s commitment for price-stability and the value of money and demand. The scenario clearly depicts the situation or condition the US economy is going through. The central-bank has had approached the inflation trajectory close to arrive at the hike, but the Fed index of inflation gauge has failed to turn out as expected. The consumer personal expenditure (CPE) with so low fuel prices has failed to increase inflation because of low spending and inflationary expectations have also increased savings. But, higher wages show that there is a competition to attract labour and might also indicate overheating and tightening. Labour is among the scarcest factor of production against the long-held assumption of old models of unlimited supply at a fix price or wage. The supply of labour is the prime cause of low-supply and higher prices in the short-run. Lack of skills too add to the problem of low-supply. Therefore, countries try to update its economy with innovation that increases productivity to overcome labour shortage problem and reduce cost and prices to remain competitive. Full-employment is a major supply side constraint beside food and fuel which may also signal overheating and inflation. However, CPE has been the preferred gauge of inflation for the Fed which shows lower inflation compared to the wage inflation as seen in the hourly compensation. Higher wages and prices indicate higher demand in the labour market but food and fuel prices indicate less demand pressures also due to good supply condition. The US is a developed country, but still constrained by the supply of labour also because of falling population and labour-force participation growth rate...  

RBI's policy...

Almost everybody forecasted a status-quo for the today’s RBI policy review because there were ample reasons to expect RBI to wait and watch the latest data and the outcome is also same. RBI kept repo-rate constant at 6.75 with no liquidity injections. Inflation in the recent data, around more than 5%, after two consecutive months of increase may still indicate food supply problems due to seasonal problems and rains that INDIA face almost every year. Inflation in INDIA mainly emanates from the ineffective supply management of food articles. INDIA suffers from seasonal inflation because it is too much dependent on rains and also excessive rains in some parts which lead to flood and crop damage. Every year drought and floods upset prices of agricultural products. Lack of demand and supply data, and effective action in order to maintain price-stability and demand puts INDIA in a fix and delayed monetary-policy action to increase growth for the past several years. Nevertheless, the situation has improved on account of proper actions to manage food-supply by the government and retail inflation has come down from double digits to below five-percent. However, to avoid seasonal inflation there is alot more to be done to get ontime data and effective actions. Agriculture needs a lot of planning to reduce the lag between demand and supply adjustment. The government has a larger role in the supply-side management rather than tweaking demand by the monetary-policy.

RBI in its monetary-policy stated that banks still need to pass-on the previous rate cuts as the interest-rate transmission has been close to half which leaves room for banks to lower the existing rates. Nonetheless, RBI maintained that the monetary-policy would remain accommodative as long as disinflation continues. The RBI proposed to bring methodology to set banking rate as per the marginal-cost of funds. However, the strategy to set bank rates according to marginal cost might not work without opening the sector for more investment and competition. More banks in the market with good regulation may help set rates according to marginal cost. The competition to increase market share results in price-competition among firms. It would also improve transmission... The RBI might try to increase competition in the banking industry...