India's monetary system amazes Harvard guru

Benjamin Friedman, William Joseph Maier professor of political economy, Harvard University, on Tuesday said the Indian monetary policy management has been one of the most impressive in the world.

He was talking at a seminar, "Is inflation targeting good monetary policy?" at the Reserve Bank of India.

According to him, inflation has been modest, economy growth rate is good and the exchange rate has been managed within the mandate of the broader economic objectives.

He said when the economic growth is strong real interest rate should be maintained and even raised.

Friedman refused to forecast on the dollar movements but stated that there is less scope of government deficit going down in the US as the government's priority is on tax reduction and military expenditure.

He said that the central banks should concentrate on the broader economic objectives to formulate the monetary policy and be transparent about the objectives to the market so that policy movements should not bring out surprises.

Citing examples of Bank of England and Canada, he said that countries which have adopted inflation targeting have in the process become more non transparent about the objectives and conduct of monetary policy.

Narendra Jadhav, principal economic advisor, RBI said conducting monetary policy with inflation targeting will amount to choking growth without attacking the source of inflation.

Freidman was of the view that if we need economic growth and employment, maintaining price stability is important to avoid deflation as well as inflation.

However, he stated that there is no need for changing monetary policies so as to avert volatility in the asset prices in the financial markets.