Letters: Tracking monetary policies

This refers to Rishi Shah and Abheek Barua's article "An old index, but new insights" (September 19). Economists are generally wiser in hindsight, but the past does not govern the future. The index based on past data may be used in monetary policy-making as a rear-view mirror to drive down the monetary policy highway, factoring in the potential impact of several factors to steer money supply and the inflation trajectory as close as possible to the desired course. But is there a reasonable degree of certainty as to the causality and the operating structure of the transmission mechanism, to which the authors refer, and that of the emanating money-price outcomes? Inferring from findings of econometric analysis of passive historical observations and data has its own limitations. In the circumstances, the adequacy and propriety of the extent and frequency of increases in the policy rate effected by the Reserve Bank of India to control inflation - involving subjective assessment and judgement of the central bank - will always be a matter of conjecture.

Biplab Chakraborty Kolkata

Abheek Barua replies: I agree that most economic analysis has the benefit of hindsight while central bankers have a far more difficult task both in trying to predict the future and also assessing the impact of their action on the future. I certainly don't envy central bankers or policy-makers in general. However, this does not obviate the need for evaluating the effectiveness of policy decisions and their impact through rigorous statistical analysis.

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