Stagflation not unique to India

 

Much as the markets and pundits like to bash the government for policy paralysis and other assorted ills afflicting the Indian economy, a look abroad finds India in the same boat as Brazil and Indonesia. Since the North Atlantic financial crisis, growth rates have slipped while inflation has increased or remained at elevated levels in many large emerging economies. That’s because, while local demand and supply scenarios are responsible to a large extent for domestic inflation, global liquidity and the depreciation of the local currency also play a part, argues bank of america in a recent note. That also explains why high current account deficit countries such as India, Brazil and Indonesia are the ones struggling the most to contain inflation.   

Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when the productive capacity of an economy is reduced by an unfavorable supply shock, such as an increase in the price of oil for an oil importing country. Such an unfavorable supply shock tends to raise prices at the same time that it slows the economy by making production more costly and less profitable. famously described this situation as "too much money chasing too few goods".

Second, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the and the government can cause stagnation by excessive regulation of goods markets and labour markets. Either of these factors can cause stagflation. Excessive growth of the  taken to such an extreme that it must be reversed abruptly can clearly be a cause. Both types of explanations are offered in analyses of the global stagflation: it began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway
Stagflation undermined support for Keynesian consensus. The rise of conservative theories of economics, including monetrism, can be traced to the failure of Keynesian policies to combat stagflation or explain it to the satisfaction of economists and policy-makers.
Federal Reserve chairman paul volkar very sharply increased interest rates from 1979–1983 in what was called a "disinflanatory ." After U.S. prime interest rates had soared into the double-digits, inflation did come down; these interest rates were the highest long-term prime interest rates that had ever existed in modern capital markets. Volcker is often credited with having stopped at least the inflationary side of stagflation, although the American economy also dipped into recession. Starting in approximately 1983, growth began a recovery. Both fiscal stimulus and money supply growth were policy at this time. A five- to six-year jump in unemployment during the Volcker disinflation suggests Volcker may have trusted unemployment to self-correct and return to its natural rate within a reasonable period.

Much as the markets and pundits like to bash the government for policy paralysis and other assorted ills afflicting the Indian economy, a look abroad finds India in the same boat as Brazil and Indonesia. Since the North Atlantic financial crisis, growth rates have slipped while inflation has increased or remained at elevated levels in many large emerging economies. That’s because, while local demand and supply scenarios are responsible to a large extent for domestic inflation, global liquidity and the depreciation of the local currency also play a part, argues Bank of America in a recent note. That also explains why high current account deficit countries such as India, Brazil and Indonesia are the ones struggling the most to contain inflation.  

Rahul kumar Gupta,PGDM,1st Year...

Source:-MINT