The Federal Reserve chairman Ben Bernanke will meet the RBI governor Duvvuri Subbarao on October 10th at the RBI head quarters to discuss the state of the world economy. The Federal Reserve had recently received much criticism for announcing the third round of quantitative easing which involves buying bonds to drive down the interest rates. Many policy analysts believe that the move is intended to strengthen Barack Obama’s reelection prospects.
While it is not clear whether the move is intended to revive the economy or politically motivated, it is true that the Federal Reserve has historically enjoyed a great degree of political independence. The Reserve Bank of India has less political independence than the Fed, though central bank independence is increasingly become the norm of monetary management throughout the world.
After the mid-80’s, the rate of inflation in the United States has been unbelievably low by historical standards. In this period, the US economy often witnessed high levels of productivity and a very low rate of unemployment. Even economists who opposed the Fed considered its performance to be very close to optimal. Things went on well till the economic crisis of 2008. After 2009, however, the unemployment rate in the United States has crossed 8 percentage.
The performance of the RBI, on the other hand, was far from being impressive. In August 2012, the inflation rate was 7.55 percentage, which was the highest among the BRIC nations. The rate of inflation in India had averaged 7.8% since 1969. The inflation rate in India hit its peak in 1974 when it reached 34.7 percentage. The highest inflation rate of the United States since 70’s was only 13.5%. Since
the 1950’s, the rate of inflation in the United States was often less than 4.5%.
Though many economists and investment experts claim that the Fed is printing money recklessly, only one to three% of the US federal budget comes from segniorage. For many decades, printing of money had contributed only around two percentage to the
financing of government expenditure. This was true, even when the inflation rate was incomparably high in the United States of the 70’s. Central banks in other western democracies too have had lower levels of inflation.
The performance of RBI and the central banks of some third world countries, however, are not too far from the stereotype of the policy analysts who oppose the Fed. But, even in the India and other countries where inflation had reached two-digit levels in the recent past, the segniorage does not form a significant part of government spending. It is estimated that till the 70’s, segniorage in India was not more than one percentage of the GDP and after the 70’s, it was around 1-3 percentage.
Most economists and policy analysts believe that political independence has allowed central banks to become close to the most efficiently run government institutions in the western world. Price stability is found to be positively correlated with the
degree of independence enjoyed by the central bank.
