Unemployment means we have excess capacity....

The price level or the general price level and expectations affect real interest rate and real wages and incomes and expectations which decide the level of all spending – consumption and savings and investment or debt fuelled spending.

Nonetheless, the central banks job is to target a real interest rate and expectations (too) to increase investment to full employment and full growth through the general price level and expectations.

During deflation and low growth it adopts an expansionary policy or lower real interest rate to increase investment employment income demand prices supply and growth and during high inflation and high growth it controls prices to keep real rates and savings and again investment stable.

We see that investment again increases investment until full employment is reached in the expectation of higher prices and if the agents believe that a particular rate of inflation is consistent with full employment or the nairu rate they would not invest more in the expectation of higher nominal interest rate and the spending and growth would be stable.

Clearly there is a role of communication in the whole process to increase the credibility of the reserve bank in forming rational expectations by achieving price stability and full employment.

Nonetheless, the unemployment or jobless data are too late in INDIA compared to the US.

The data on unemployment is a crucial part of the policy making at the central bank because its objective of the full employment, the RBI rarely talks about the unemployment rate while deciding the nominal interest rate.

And, a higher unemployment rate means that there is excess capacity in the economy to increase productions supply and lower prices.

The RBI actually works with a late data on unemployment and a month old data on inflation.

The monetary policy would be more consistent and credible when we have updated information on both unemployment and inflation.

If there unemployment and inflation in the economy it means we have an excess capacity which could be used to lower the general price level increase demand employment and growth.