Nobels on the noble rate cut

Dear Reader,

Hi! Here’s a quick spoof on what the Economics Nobel Laureates would have said when Dr. Rajan cut the repo by 50 bps! The spoof appeared in my column “Tweakonomics” in the Hindu Business Line today and you can see it at http://www.thehindubusinessline.com/opinion/cutting-to-the-chase/article7707882.ece

Else, read it here. Enjoy!

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New Delhi is seventh heaven after the repo was cut by 50 bps. But in seventh heaven, many renowned economists and Nobel Laureates got into a heated argument on the repo cut. They finally decided to get down to the hub of monetary economics, the Chicago School of Economics, for a round table on the RBI move.

“Pah!” said Adam Smith, shaking his head in disagreement. “I totally dislike these modern, new-fangled approaches to policy making. Pah! Waving about his hands talking about the 50 bps cut. No, no, no. What you need is invisible hands. Where are the invisible hands that will take the economy to full employment? Show me those invisible hands!”

“Now, now, daddy. How can anyone show you what is invisible in the first place?” shushed Alfred Marshall. “I am telling you, the only way to decide whether this rate cut is a good idea or not is to figure out the marginal benefits and compare them to the marginal cost. The marginal cut, if transmitted marginally properly into a marginal lending rate cut, will usher in more marginal investments.”

“Balderdash!” said Lord John Maynard Keynes . “This is exactly the kind of madness I don’t like. You freshwater folk at the Chicago School make me sick, all of you, with your talk of monetary intervention helping investments along. You want investment revival, eh? Then don’t rely on the RBI. Spend more, directly. Why are we even discussing Raghu? We need to talk Arun! Let Arun dig a hole and let Arvind fill it in. That’ll do more multipliers than all these repo cuts!”

“Forgotten that India has a stagflation history, have we, Mr Keynes?” inquired Milton Friedman silkily. “I have proved conclusively that in a stagflation model, fiscal expansions can yield only inflation! So don’t you get started on Arun digging holes. He’s behaved admirably, plugging all the fiscal holes and keeping the fiscal deficit low. That has allowed inflation to reduce. And now my boy Rajan from Chicago School has done the needful by reducing the repo rate. I totally like this boy. The only problem with him is that he is a bit too discretionary for my liking. I wish he’d set a rule in place to change the repo rates.”

“It doesn’t matter, Guruji.” That was the calm voice of Robert Lucas Jr, the earthling. “Raghu knows exactly what he’s doing. He’s affiliated to the Chicago School, after all. (“God save the king! Now there is no hope for India anymore!” That was Keynes. ) He and Urjit both kept talking about how India is not yet on a sustained low inflation. Thus, they both created rational expectations amongst all market players that repo won’t be cut or at the most will be cut by only 25 bps. And then, he delivered a 50 bps cut. Thus, even while giving a generous cut, he’s managed to create an aura of being the quintessential inflation warrior. So, even if the rate reduction brings about a demand increase and the inflation blips up a bit, inflationary expectations of the public will be rationally tied to the inflation-warrior image. Now that’s what I call a master move!”

Commotion erupted on the comment. “Monetarist!” “No, more of a Rational Expectations influence.” “Inflation warrior!” “Interventionist!” “New Classical economist!” “Train him to be Keynesian, someone!”

There was sudden silence as he walked into their midst. Which school do you adhere to when you do the policy, they all seemed to be asking. “My name is Raghuram Rajan and I do what I do.”

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4 thoughts on “Nobels on the noble rate cut

  1. as always..great used of drama this time..

    though there could be a twist in the plot ..Chicago school econc and Keynes can never really meet..Keynes might never have been invited to the school …Even if he is secretly invited, Lucas would surely walk out…Friedman might hang on to have a duel which could not happen…The discussion would most likely have moved on to war between the two blaming each other for failures of economic system..

    Liked by 1 person

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