QE and Economic Growth

Last week Monday (i.e. September 19, 2011) the Bank of England claimed that "Quantitative Easing (QE) alleviated economic crisis" It is stated that " .... its first to measure the effect of QE on the economy, found it provided a "significant" aid to growth and helped GDP increase by between 1.5% and 2%. This was equivalent to dropping interest rates by between 1.5 and 3 percentage points .... "

This article remembered me another article which was published in Buttonwood of Economist on Jan 4, 2011 titled "Show me (the Effect of) the Money". This article states that "David Ranson of Wainwright Economics is a sceptic on this issue and has analysed the data over the period of 1950-2007. He has looked at monetary base growth rather than M2 or broader measures for one very good reason. It is clear that QE has had a much greater impact on the monetary base (doubling it in the autumn of 2008) than on other measures such as credit growth" (Note: The analysis is done on US Data)

It is further stated that "Ranson divided the 57 years period from 1950-2007 into two-years  when the monetary base grew at an above average rate (8.1%) and years below average growth (3.5%). Economics growth was higher (3.7%) in the years of slow money growth than it was in the years of rapid growth (3.2%). The same is true for industrial production. Even the stock market performed better in years of sluggish money growth". The Economist went on to claim that QE will not really help the economy. Now, Bank of England claims that QE helped their economy to move further. 

For some point of time QE was not in newspapers or aticles; but now they are back, thanks to the EURO debt crisis and Bank of England. Three days ago (i.e. 27.09.2011) in Economist again there was an article titled "Which region needs QE?", the article made comparisons on three economy's namely U.S. , England and euro area over the QE. It went on to say that euro area have slowest of the money growth.


After reading these three articles few questions raised in my mind 1. Do QE will really help the economy to move faster away from any crisis? 2. Why QE fails in U.S. when it can help the other economies? (I think probably due to poor banking managment) 3. Is there any direct relationship between QE, Inflation and Growth Rate? It's not easy to answer all these questions, but history and repeated economic events/crisis gives some near answers for these questions. (Leaving open ended for analysis)

RBI's Goodwill At Stake?

From the recent review, actions and projections of RBI, I am really baffled on What RBI is trying to do? and raised the question that whether RBI had Gone Mad? I may not be an expert on these lines, but, being an economics student one can at least feel the pulse to certain extent. 

In an weekend newspaper M.D.Nalapat had written an article titled "The RBI had Gone Mad". In this article, the writer says that "India Inc has been crippled by the duo's policy of relentless rate hikes, ostensibly to "rein in inflation". Neither Reddy nor Subbarao had IQ needed to understand that Inflation in India is caused by factors other than the Interest Rate is a Tragedy for the Country". 

He further stated that "Inflation since the UPA took office in 2004 has been largely caused by uncontrolled Government spending, mostly on programmes that are designed to increase the tally of the congress for the next elections. Thus, instead of public works programme that would expand rural infrastructure, what has been implemented is a dole that does nothing to ensure that permanent employment opportunities form as a result of the huge Financial Outlays of the Sonia Gandhi-approved schemes" 

Of course, this post is not about the writer's political view or his general view.  But the above mentioned article have few valid points, which we need to note, that Inflation in India is not only because of the money supply but it is due to various factors. (Austrian economist may argue differently - but, we are not here for any debate). This article further strengthen my queries and doubts on RBI, here are the 2 major points from this article which supports my query on credibility of RBI


1. The article says that Inflation in India is not due to the prevailing interest rates but it is due increase in uncontrolled Government spending. (RBI failed to feel the pulse?)


2. The Interest rate in India is much higher compared to any developed nation(not even UK and Europe) and China is the only country which comes closer to our interest rate.


This article is not the only reason which made me to raise question on RBI's credibility. There are more valid reasons, they are as follows: 


Few days before (i.e. on 16 September, 2011) RBI had announced its quarterly review with an hike of 25 basis points (as expected). They came with the usual reply that this move is to control prevailing inflation. Despite the fact (I hope they know) that raise in interest rate alone cannot contain the present inflation rate. 


For the past few years, predictions and revisions of the Central Bank (RBI) have gone hand in hand. In recent past, whenever RBI makes prediction it hardly takes a month or so that it revises its own estimates. After 3 times revision, RBI had predicted the Inflation level of 8% for the year 2010-11, whereas, the actual Wholesale Price Index (WPI) by March 2011 ended at 9.68 %. In the latest review it predicts that inflation will be 7% by the year-end (i.e. March, 2012). (Note: The current (August) WPI stood at 9.78% (Provisional) as compared to 8.87% corresponding month of last year (2010)) 


Being the Central Bank of country, if RBI fails to feel the pulse of the economy, then it will be a great difficulty for the nation to achieve its macroeconomic objectives. Already people have started losing their confidence on RBI. RBI's credibility and laud which it had received from across the globe are now at stake. In simple, RBI's Goodwill is at stake.