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Re: Next Topic - Economy

Administrative Note:

Week's Agenda: Economy

At 11:52 AM 10/9/98 -0700, Prabhu wrote:

>I prefer pegging the value of the currency to the
>price of gold on the international market.  This is the only genuinely
>and unarguable way.  

There is nothing less objective about, say, pegging the rupee to the US
dollar. What a currency peg does is make monetary policy (and hence
inflation) responsive to trade balances and changes in FX reserves (e.g, via
a currency attack). I would advocate a currency peg if India was seriously
suffering from hyperinflation. However, in the absence of such, a fixed
currency reduces the govt's most potent policy tool to increase
competitiveness in the global economy. (I.e., I would rather have the
Reserve Bank intervene in the FX market to weaken the rupee than face angry
workers who take to the streets to protest against wage cuts!).
As a policy matter, I advocate a managed currency that changes the value of
the rupee to maintain competitiveness (i.e., adjusted for inflation
differentials). Although a theme of this debate on IP is free markets, I
think there is a strong case here for intervention. (I believe that the
rupee would adjust correctly without intervention, however the political
cost of wild swings in the currency, as well as the accompanying lower
investment levels, are outweighed by the need for a stable operating

P.S. There is nothing in our economics books that says a Nobel Prize is a
guarantee of 'wild riches' in financial markets. In fact, my view is that
these brilliant men knew the risk/reward profiles in their bets, but they
were just plain 'greedy'. That is, either they knew that if they took a
large enough bet, they could be bailed out when in trouble. 

- Pratap

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