Sunday, July 20, 2008

Blending fiscal policy & Monetary Policy Credibility:

Experience confirms that the best way to pursue price stability is through a credible monetary policy. This implies the public declaration of the objective and the implementation of policy measures whenever developments show a departure from it and not to renege on its earlier promises.
However can monetary policy alone sustain the objective of price stability? Presently the monetary authorities are increasing the CRR and manipulating interest rate to pull down prices but prices are tending towards double-digit rate.
Such policy practice can affect the investment scenario, as decision makers might find it difficult to get investment funds as cost of borrowing increases culminating into an offset in the supply front. This might accentuate demand supply imbalance spiralling prices upward.
Given the root cause of current price spiral to be both demand side and supply side factors; the need of the time demands a judicious blend of fiscal and monetary policy.
Richa Shukla
(Globsyn Business School)

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