Consistency and Credibility....

The Economic Models and the reasoning and logics in the parlance of Economics have been charting a course set by the empirical evidences on the effect and causes of the economic policy and banking on the economy, for which, both, the government and the central bank are directly linked with the work of deciding the inducements, incentives and stimulus for the economic subjects and expect an outcome based on the promise of jobs for all and the value of money or the purchasing power or higher real wages, incomes, salaries and profits, since the central banks’ commitment to maintain the value of money and jobs for all to boost demand and supply and real prices and the economic growth and expectations gives credibility to its actions…. The government could not have different objectives since it would override the case for the consistency of the economic policy, also called the time consistency of the economic policy, but we have still evidences for brinks between the government and the central bank goals due to the political objective of votes, which also rests on the public spending and the central banks role to augment private spending by adjusting to interest rates, depending on the promise of jobs and value for money, however the central banks’ job is the get a neat work with the trade-off between prices and unemployment which uses the evidences put by the Phillips Curve Analysis which has seen further improvements with the time, of which lower prices and higher real wages, also put in the form of one of the Stylised Facts (economic conclusion based on real time data or empirical evidences), is a further improvement besides effect of the international trade on the prices and jobs.

The concept of the frictional unemployment or the natural rate or the NAIRU – non accelerating or constant or the consistent inflation rate of unemployment - has the same root in the Phillips Curve, which is based on the evidence of the UK economy that an unemployment rate of 5% was consistent with a 5% inflation rate to maintain jobs and price stability, which is equivalent to the 2% inflation in the US and 4% in INDIA target with full employment, otherwise overheating could increase interest rate and expectations, nonetheless the price level has shown a downward bias due to lower borrowing cost and higher supply with time in both the US and INDIA, which could be helpful to bring about an adjustments in the real interest rate and nominal interest rate and increase investment and employment and growth (higher demand and supply) through lower borrowing cost or nominal interest rate and higher real interest rate and prices. When nominal interest rate hits zero and the general price level falls due to higher supply, foreign trade, too, which would be expansionary in terms of demand supply and growth and expectations through higher real prices, real wages and real interest and consumption, and, savings and investment due to lower price and price expectation by lower the borrowing cost. Since, wages are sticky, but commodity prices and interest rates, are not, which could benefit supply and economies of scale and real return on investment.

Notwithstanding, the argument that inflation cuts real wages and real interest rates and makes the economy competitive is not acceptable, because, ORC, if inflation would increase due to higher borrowing cost and lower supply, it would make the economy uncompetitive because it would also increase nominal wage cost inflation and interest cost inflation…. It would reduce demand supply and growth expectations….

Moreover, higher real wages, lower domestic exchange rate and foreign exchange rate in the face of lower borrowing cost would also increase, both, imports and exports and the global demand and growth, apart from the domestic demand….

Inflation and inflation expectations, due to higher borrowing cost and lower supply and lower demand, would reduce ALL, consumption, savings and investment and employment and growth and expectations………,