Bond Issuance, Purchases Central Bank – Part IV By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

August 30, 2016 | Posted by bobbysrinivasan << back to blog

This is an ongoing conversation between a Student and his Professor.

Student: When do we say that the Central Bank has failed in its responsibilities?

Professor: This is a very tough question. Central Bank is mandated to play a certain role. For example, in India the RBI’s main job is to control the inflation rate using the tools available to them such as changing repo and reverse repo rate, altering Cash Reserve Ratio (CRR), involve in issuing bonds for the market stabilization scheme and through Statutory Lending Rate (SLR). Currently the Indian inflation rate is around 6% considering the global negative inflation rate; we still have a long way to go.

Student: It is very similar in every country?

Professor: Not entirely. In the US in 1978, the Humphrey-Hawkins full employment act signed by former President Jimmy Carter added management of unemployment to the Feds mandate. In India RBI is not directly concerned about unemployment rate.

Student: Reverting back to question, is the Central Bank doing a good job?

Professor: I am trying to avoid the question. Since you insist, I will talk about what I know.

Higher interest rates are known to stump the economic growth. But the country may require high interest rates to control inflation. For politicians desired economic growth is an election promise. This is where often conflict arises. The fiscal policy authorities often claim that the high inflation rate cannot be controlled by purely high interest rate. They say that it could also be due supply disruptions and shortages. Yet another important job for the Central Bank is to keep the currency rate of the country at the appropriate level. For example the Indian rupee is hovering around 66 to 68 to a dollar for a long time.

Student: Did the US succeed with their unemployment situation?

Professor: No. They did poorly. Their act set a numerical goal of 3% unemployment by 1983 along with balanced budget and price stability. The unemployment rate was 10.4% in 1983, 7.8 in 1992, and 6.3% in 2003 but went upto 10.9% in 2009 due to the sub-prime crisis. Currently it is around 5%. In the meanwhile many dropped out of the job market due to inability to find a job. During Obama’s presidency, 15 million jobs were created. But the job created were of low wages. In other words, poverty has increased tremendously in the US in the last few years. 47 million people are living supported by food stamps. Real wages adjusted for inflation has dropped significantly. The blame game has started. Politicians are blaming the illegal immigrants. The economic policy currently favors very rich people. For example, of the current GDP growth rate 90% goes to the top 1%. Bernie Sanders a former political democratic presidential candidate kept harping on this during the campaign.

Student: How did the US bring down the unemployment and created 15 million jobs? Is it not a measure of their success and how did their fed facilitated achieving this?

Professor: You seem to ask endless questions. Let us talk about in the future. OK.

Student: Thanks Professor.

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