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Re: Next Topic - Economy



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Administrative Note:
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Week's Agenda: Economy
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This is a matter of preferences, on which you will find equally 
     qualified, thoughtful and well-intentioned people on all sides of the 
     debate.  From time to time, we will all prefer different stances.  The 
     question is: how "realistic" (in light of today's situation) and how 
     "ideal" (in light of where we want to get to) do we want to be?
     
     However, I must say thatif we WERE to have a currency peg, this is the 
     wrong time in history to be pegging to the US dollar, as it is bound 
     to be replaced by the Euro in the short- to medium-term (US share of 
     world GDP: roughly 25% at present; Europe's share of world GDP in 
     spite of all its inefficiencies and WITHOUT yet the introduction of 
     the Euro: roughly 30% already).
     
     
     Professor Prabhu Guptara
     Director, Organisational and Executive Development
     Wolfsberg Executive Development Centre
     (a subsidiary of UBS AG)
     CH-8272 Ermatingen
     Switzerland
     Tel: + 41.71.663.5605
     Fax: +41.71.663.5590
     e-mail: prabhu.guptara@ubs.com
     
     


______________________________ Reply Separator _________________________________
Subject: Re: Next Topic - Economy
Author:  praju (praju@ideaus.com) at nyuxuu
Date:    11.10.98 05:09


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 
objective
>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 
environment.)
     
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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