Sunday, March 27, 2011
A Dilemma I Observed Down Here in Nepal
I already came down to Nepal and started my job in the country's central bank. After a brief review of macroeconomic situation of the country I observed that the bank was facing a dilemma which has posed a serious question for the bank's policy-makers. The dilemma was that the bank was following a tight monetary policy (by decreasing money supply) in recent months but the inflation was soaring up (currently about 10 percent). The bank, in fact, had pursued this policy to control the rising inflation but the outcome is unexpected. We learned in textbook that money supply and inflation had positive relationship but we didn't observe this situation here in Nepal, at least for now. To my understaing, money supply is not the only factor to govern inflation but we have so many other factors - such as cost condition of the companies, distribution channel that may block smooth flow of goods and services in the economy, and so on others - that determine inflation. I expect your opinion explaining why this situation could have occurred.
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Inflation could be rising from numerous different factors, and perhaps the monetary policty isn't strict enough to offset inflation in a short term. Some of the other factors that could be causing inflation is a rise in production cost due to increases in wages or more specialized labor. It could also be due to shocks in the economy such as a sudden rise in fuel prices.
ReplyDeleteRadha Valsadia
ee4225
This could have occured because of the increase in wages due to the rise in production cost. Also, because of the monterary policies are being enforced enough to cause the inflation level to become short term.
ReplyDelete003865356
The rise in inflation seems odd due to the supposedly tight monetary policy and decreasing money supply. Maybe it needs to keep decreasing the money supply. The poverty and low wages combined with rising food costs, or costs in general, could have caused inflation to soar upwards.
ReplyDeleteNicholas Recchia
(004067913)
Well I believe with the economy everything is becoming more costly. People are buying more causing inflation to control the money being spent along with production. The higher cost the less people are to buy items. A decision has to be made.
ReplyDelete493641 eco2020
I feel that it is due to a number of things. All of my peers have touched on a number of different things that could have caused the rise in inflations. The most closely associated to this in my opinion would be the poverty in the country and the rising costs of everyday living.
ReplyDeleteNaumaan S. Khan
(EO3953)
ECON
t-th 4:30
Money supply is not the only factor affecting inflation. You have demand pull and cost push factors. Since the money supply has cut down, people don't have money, but that doesn't mean that the production costs have decreased for the goods & services.
ReplyDeleteHaya Suleiman
Ei1268
Macroecon
Sat 9:35-forever.
It could be that the amount the money supply was decreased by was not enough to completely offset the increase in the inflation rate, but it may have prevented the inflation rate from increasing even more. Maybe, the money supply needs to be controlled even more tightly.
ReplyDeleteSyed Rashid
004044996 / ED1152
ECO 2020-21635-007
Sat 9:35-1:15
it not fair, why hold up the money. money need to be used to make more money, if i was then i would get insurance on the money then i would loan it out to people with great bussiness plan to make th economy move.
ReplyDeletethat was M Campbell comment from Saturaday class at as7556@wayne.edu
ReplyDeleteInflation is normally due to the disequilibrium caused in aggregate demand and aggregate supply. This one was initially caused by an increase in the demand and production cost in the economy.
ReplyDeleteThis persistence of inflation might have occurred due to an increase in the consumers’ income, decrease in productivity or even due to the natural disasters that are happening around that somehow contributed to the increase in production cost, decreasing productivity, which further increased the demand and thus soaring up the inflation. Some other factors might have also contributed to this inflation such as, the credit policy, political factors or even due to a government failure.
ALI ALFAIFI
AZ0210
ECO 2020
Sat 9:35-1:15
The Situation could have occurred due to inefficiency in the tax system or financial market. According to the Quantity theory of Money, "Low inflation is not always a government priority. Government spending must be financed by: Tax revenues,Borrowing from the private sector, or Seignorage." This could also be the reason for such high inflation. The government may have more obligations at higher priority that prevents them from tackling the increasing inflation rates.
ReplyDeleteTierra Dawson
ed1241
ECO 2020
Sat 9:35 - 1:15
Utkarsh Patel said..............
ReplyDeleteMy understanding of inflation that, it is simply the increase in prices of goods and services in economy or decrease in the value of money. It is said that when the quantity of money used as the medium of exchange in the economy is more than quantity of goods and services, inflation is most probable. This can be caused due to some direct causes such as increase of income or some indirect cause as political forces in an economy. Inflation can be caucused by an excessive increase in effective demand and production cost in the economy. Mostly, it caused due to the disequilibrium caused in aggregate demand and aggregate supply. There are several factors than can cause in increasing price rate such as; income of consumers, credit policy, natural causes, lack of raw materials, techniques of production, industrial disputes and political factor are some of the caused might be reason for inflation in Nepal. I think this is not the only factors that can cause the inflation in Nepal but, consumption habit, heavy tax rates, money printing, dependent economy and slow growth in GDP are might be part of inflation in Nepal.
Utkarsh Patel
ee4392
ECO 2020
004058754
There can be different factors causing the negative relationship between inflation and money supply that may not have a textbook explanation. The cost of living and prices of goods and services are constantly rising and going above what the country is prepared to handle, just like any other country. The production of goods and essential services may be more than what consumers are able to purchase due to insufficient or decrease in income. Maybe the money supply is being decreased by too much, it may need to be freed up to have more comsumption and the inflation rate may not soar but become steady or begin to fall.
ReplyDeleteDominique Blockett (ECO 2020)
in many third world countries banks are not used by many people. also with cost of living and prices of goods and services constantly rising many consumers would be unable to keep up. Government spending could also be a reason as well.
ReplyDeletepradeep bhat
eg2363
Inflation is controlled by many things, not just one. In this case it has mostly to do with market values and inflation. Not factoring inflation affects the overall relationship between the bank and the dilemma they are facing at the moment. What is written in writing in textbooks is not always accurate, because the information may only be implied to certain situations, thus I believe they are not to be relied on for precise situations, but looked at for an overall understanding. Factors such as an overall increase in poverty levels, or higher cost of living might have caused this situation to occur. Money supply is decreasing, and thus the unhealthy bond with people buying more may be causing the condition of this bank.
ReplyDeleteMuskan Ali
ea4900
When prices the currency value fluctuates, it can have dramatic effects that ripple through an economy.
ReplyDeleteOver the last few years, Southern Asia (including Nepal) has been subjected to higher-than-average levels of investor attention (due to the downfall of european and american economies during the peak period of our recession) - according to Bloomberg.com. Thus, they have been exposed to more scrutiny and publicity than the regions would most likely normally find.
This extra attention and monentary scrutiny in the region means that there is a higher chance for volatility across all markets, thus making Hyperinflation a very likely reality. Without getting too in-depth, i'll give a rough example of how impoverished regions might try to fight this volatility by trading in commodities and decreasing the velocity of the currency.
When impoverished regions experience a devaluation in the value of their currency, they may begin to use trading/barter systems in which the commoditie often purchased with currency are no longed "priced" with such a volatile placeholder. Instead of buying a cow for 100 one day, knowing full well that the price could plummet to 30 the next day, a farmer would be more likely to trade 5 chickens, for example, where a value is sutained that is less of a loss than a highly volatile market would likely create.
Ryan Marchand
MACRO-ECON
It could be that the monetary policy was pursued for too long. A problem with monetary policy is when there's a long interval of time before action is made, for instance if the central bank doesn’t implement the policy once the inflation rate was rising and the central bank waited too long to utilize the policy then the problem may have changed by the time the central bank decided to decrease the money supply. This decreases the efficiency of the policy and may have caused the 10% increase in the inflation rate. Furthermore, the committee judges of the central bank should carefully monitor inflation developments and I read in the textbook that the central bank should increase the nominal interest rate by more than 1% point change of the inflation rate. Otherwise the interest rate would fall and and the inflation rate would rise.
ReplyDeleteKaren Scofield
dw8316
When adjusting money supply in an economy, there must be a common balance. Since there are so many unknown factors in Napel, it would be wrong to simply imply that what works in one economy can just work exactly the same in another. Perhaps the government could sell bonds as an alternative to raising the money supply with a more efficient way of keeping inflation lower.
ReplyDeleteAnthony Talbert
000305518
Inflation occurs when there is an increase in general price level for all goods and services. There are numerous types of inflation; one is increasing the price of items. This type of inflation occurs when the firms houses and industries decide to increase the price of their particular goods and services to increase their profit margins. Also hyperinflation has a lot to do with our current inflation.
ReplyDeleteSarme Shabo
Ap3599
I think that the bank was decreasing the money supply so that they are saving money, rather than thinking about the economy as a whole. Just like so many banks in the U.S have done. They got a bunch of money from the government, but they still aren't giving out loans to people. I think that the bank should stop decreasing the money supply so much, which would in turn help the inflation to go down. With inflation being so high it will decrease the real value of money, discourage investment and savings, and eventually lead to a shortage of goods for the consumers. This is very bad for Nepal's economy.
ReplyDeleteHeather Wood
003789162
This seems really interesting and quite confusing. Maybe the rise in inflation will eventually be remedied if the restrictive monetary policy continues.The lack of well paying jobs along with poverty and the high cost of living might be the actual cause of the rise in inflation. Maybe some social aspects of the economy need to be examined.
ReplyDeleteThe reason for the inflation that happend from governement decreasing money supply may have happend due to many economic reason. I have also read in the textbook that the central government has some effect on how the inflation occurs. The inflation can also be from the reason of governemnt deciding to print money to take care of other expenses.
ReplyDeleteAmina Begum
EK5050
ECO 2020
The rise in inflations could be happening from many different things. The monetary policy might not be good enough to control the inflation so it might need to be stricter. Increases in production cost of goods and services could also contribute to the rising prices. To fix the situation, you could tighten monetary policy and also focus on a more stable, long term solution
ReplyDeleteSam Karnan (eh3677)
004089210
The reason for inflation could have many causes such as poverty, standard of living, and job contracts and wages. As we learned inflation and the real interest rate have a positive relationship so when this inflation goes up the real interest rate goes up as well making it hard for the government to regulate because it is the real interest rate that they raise to control inflation.
ReplyDeleteJanelle Watts al8760
In most cases the relationship between money supply and inflation is positive, however some economist believe it is based on tbe state of the economy and not by the central bank. With a quarter of the population in Nepal living below the poverty line and nearly half the population unemployed, the state of the country is bad off. Therefore one can only expect a high inflation rate.
ReplyDeleteErika Wilkes(000418938)
Swanmika Reed of ECO 2020-006 says...
ReplyDeleteI believe this is occurring because of such the low money supply. Money is serving as a scarce, valuable resource. With that being said, the items that are being purchased with this valuable, scarce resource are valuable as well. Therefore, increasing the prices. I am very sure that there are more qualitative factors that helps explain this phenomenon.
Swanmika Reed (dy9476)
The rise in inflation and decrease in money supply is very weird phenomenon but indeed there are many reasons that it could be happening for example a change of government policies or taxes could decrease the value of money. This could also be happening because of the underground economy and the government receiving less taxes than a standard government because Nepal is unlike any other country in the world having the himalayans covering the entire country. To determine the real reason a veteran economist would have to look very deeply into Nepal's economic situation.
ReplyDeleteI think this shows that the "Free market is not a random incoherent unregulated cycle that we only have certain tools to attempt to countercylically alter. I propose that there are market forces that control the price inflation and other variables of the economy. These "Market Forces" are elite groups that can cause havoc and can cause unexplained economic situation like the one you are facing in Nepal. Economics is a valuable study but can not always explain what happens within economic ideas. IF the economist ventures beyond the symbolic Forrest of standard economic thought only then can the truth been know and only then can a rational explanation be logically attained.
ReplyDelete