Tuesday, October 28, 2014

Use Supply-Side Economics to Tackle Inflation, Not High Interest Rates

Finance Minister Arun Jaitley wants interest rates to be lowered in order to stimulate economic growth, but RBI chief Raghuram Rajan wants to keep interest rates high, in order to bring inflation lower still:

http://www.bloombergview.com/articles/2014-10-28/turn-on-the-taps-in-india

Anyone can see that India's inflation is not due to hyperactive demand from the masses and an overheating economy. On the contrary, inflation in India is due to lack of production - we just don't produce enough of the things that we need, and that's what's driving prices high, not excessive demand. The way to address this is through policies aimed at growing the supply side of the economy. High interest rates only constrain the economy as a whole. We can't keep treating legitimate demand as excessive.

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