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My take on Inflation and monetory policies(S. Mandgi)This analysis is based purely on some fundamental mathematics such as :-
A ∝ B and B ∝ C then A ∝ C
Inflation can be defined by the equation:-
Inflation(I) = function(D, S, R) where D = Aggregate Demand, S = Aggregate Supply and R = Aggregate Money Supply
Inflation is directly proportional to all the 3 mentioned factors , hence we get the equation :-
I= c1 + c2 +c3-x1.D + x2.S + x3.R
I = C - x1.D + x2.S + x3.R
I= C + D –(x2/x1).S-(x3/x1)R
I = C + D - K1.S -K2.R
Condition 1 : Consider S and R to be constant
If the ratio K1 = (slope of the Aggregate supply curve)/(Slope of the agg. Demand curve) is kept constant or if the ratio is reduced.
If the ratio K2 = (slope of the Aggregate money supply curve)/(Slope of the agg. Demand curve) is kept constant or if the ratio is reduced
Aggregate demand of goods and services. If the aggregate demand of goods and services increase, the inflation will increase considering other factors as constant
From the demand perspective:-
It is important to understand that the reduction of slope of the aggregate demand can have an early influence on reduction of inflation. e.g. importing onions to meet the rising demand is one example but this has to be followed with increase in outputs of those goods and services which have the highest influence on inflation such as the food basket.
Ways are to use technological innovation for improving food grain production and their preservation and distribution methods. Reduction of wastage needs to be followed up with proportional staggered imports of food grains till wastage reduction has minimal impact of inflation. These imports should only meet the extent of wastage and not result in excess supply causing price drops and loss to the farmers.
Distributors need to be given incentives for reduction of food wastages through elimination or reduction in taxes such as octroi and government spending on improvement of the food distribution network.
Condition 2 : Considering D to be constant
Aggregate supply of goods and services. By increasing the supply of goods and services ,the inflation will decrease or
Ways are to use technological innovation for improving food grain production and their preservation and distribution methods. Reduction of wastage needs to be followed up with proportional staggered imports of food grains till wastage reduction has minimal impact of inflation. These imports should only meet the extent of wastage and not result in excess supply causing price drops and loss to the farmers.
Distributors need to be given incentives for reduction of food wastages through elimination or reduction in taxes such as octroi and government spending on improvement of the food distribution network.
Condition 2 : Considering D to be constant
Aggregate supply of goods and services. By increasing the supply of goods and services ,the inflation will decrease or
If the ratio K1 =(slope of the Aggregate supply curve)/(Slope of the agg. Demand curve) is increasing considering the ratio K2=(slope of the Aggregate Money supply curve)/(Slope of the agg. Demand curve) as zero , constant or increasing, then the inflation will decrease.
The slope of the aggregate supply can only increase when the price of the aggregate supply of goods increase considering the same quantity of supply of goods which means the manufacturers increase their prices or the government raise taxes , either of which are not a good option considering that the GDP for manufacturing goods is periodically falling and is an issue of concern.
In order to reduce inflation, the aggregate supply of goods and services needs to be increased. Increased Govt spending on infrastructure is one such example if the money supply is kept constant or reduced by the RBI – means increasing CRR, increasing interest rates
Condition 3: Considering R to be constant
I = C+ D -K1.S
In order to reduce inflation, the aggregate supply of goods and services needs to be increased. Increased Govt spending on infrastructure is one such example if the money supply is kept constant or reduced by the RBI – means increasing CRR, increasing interest rates
Condition 3: Considering R to be constant
I = C+ D -K1.S
In order to reduce inflation considering the money supply is constant, the inflation is directly proportional to the aggregate demand and inversely proportional to supply. For inflation to be constant and in control ( equal to C) ,K1 =1 and S = D which is a standard demand supply relationship.
Concerns in the above thesis:
Concerns in the above thesis:
C is considered non negative , constant and does not change with increase or decrease in volumes.
Different Approaches to curb inflation :
Short Term Approach:
Different Approaches to curb inflation :
Short Term Approach:
The short term approach would be to control money supply and meet demand for food through imports restricted to shortfall of demand
Mid Term Approach:
The mid- term approach would be to increase government expenditure through more infrastructure projects which would benefit the nation using the countries existing natural resources such as sun, water, and other such similar resources. since the demand for power is rising at a rate of approx 25 to 30 % per year and that there are huge infrastructure costs required to meet this demand for these projects and thereby reduce power costs like telephone and mobile communication costs. Projects to improve warehousing and storage to reduce wastage, roads to reduce tranportation time are other means .
Long Term Approach:
The long term approach would be to continuously innovate through research and development and application of newer technology such as information technology, mobile technology etc to farming and rural development to improve food productivity.
Conclusion:
Governments state that there are no specific tools to control inflation but i ask whether should you treat the money demand and supply curves in the same manner as the productivity demand and supply curves since the relationship for demand and supply of money is not straighforward and involves other important factors e.g. the velocity of money.
Governments state that there are no specific tools to control inflation but i ask whether should you treat the money demand and supply curves in the same manner as the productivity demand and supply curves since the relationship for demand and supply of money is not straighforward and involves other important factors e.g. the velocity of money.
Do velocities of money have any impact on the demand of money and hence inflation besides shortage in supply of goods and services ????
