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Lower inflation target to hurt growth
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SME Times News Bureau | 24 May, 2021
A Reserve Bank of India (RBI) study has suggested a decision to have a
lower inflation target would jeopardise the long-term growth but help in
bringing in financial stability.
"The policy makers may choose
to set the inflation target below the threshold level, but only by
consciously sacrificing long-term real growth of GDP and hence the
adverse impact on the rate of poverty alleviation," said the study
titled 'Threshold Level of Inflation - Concept and Measurement'
"On
the other hand, lower inflation has favourable redistribution effects
particularly on the poor and is beneficial for financial stability," it
said.
The report has been co-authored by Ravindra H. Dholakia, Jai Chander, Ipsita Padhi and Bhanu Pratap.
Empirical
findings of the study broadly confirm higher threshold inflation and
higher growth in the emerging market economies than in the advanced
economies. From the cross-country panel data, the study also derives
estimates of the threshold inflation for India by introducing country
specific intercept and selected slope dummies.
It also provides
estimates of the trade-off between long run inflation and SSG rate -
40bps of loss in growth per 100bps reduction in inflation from the
threshold level; and 15bps of gain in the growth for 100bps reduction
in inflation towards the threshold level.
"An important finding
of the present study is that the trade-off between long run equilibrium
inflation and SSG is not symmetric around the threshold inflation. When
the inflation is higher than the threshold level, reduction in
inflation rate leads to a much smaller gain in the long-term growth
compared to when inflation is lower and rises towards the threshold
level," said the study.
Such long run trade-off along with the
short to medium run sacrifice ratios for the country should be used for
considering costs and benefits of setting inflation target in the
country, it added.
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