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Doubt #2: How does Quantitative Easing(QE) in United States affect money supply in other countries? QE leads to increase in dollar supply, so dollar should lose value with respect to other currencies(I'm not sure), but I don't see why this would lead to rupee depreciation, a reason often mentioned in newspaper for rupee's downfall.
No doubt that QE increases the value of rupee in respect to the respective currency of that country,
I can only say that QE reduce the interest rates in US/Japan, which attract business houses of emerging countries to borrow money from them, so QE is filling money in emerging economies, which cause two effects, first of decrease in rupee in International market as you have to convert those dollars in rupees to invest in India and further the increase of money supply in DOMESTIC cause Inflation.
and thats' the reason, in India they need permission of RBI to go for such transactions as it will impact liquidity(read Money supply) of the country.
Regarding depreciating rupee value, i don't think so, as both are complementary in nature and basic law of economics say that the supply of one will increase the value of other.
Central banks resort to QE (which is an unconventional monetary policy measure employed occasionally during recessionary phase) when even ~0 % interest rate fails to stimulate the growth. QE increases the money supply in the system by means of large-scale asset purchases by the central banks, such as corporate bonds or mortgage backed securities. The main aim of this newly injected liquidity is to increase lending, investment, create jobs & consumption. Obviously a long term disadvantage is high inflation
During 2008-09 QE (in the form of stimulus packages) helped both developed & developing countries alike. Apparently emerging economies regained the growth momentum however developed economies like G4 still faces stagnation, high unemployment rates & inflation too. Thus, with excess liquidity & stagnant economy at home it was evident that huge capital would flow out of these nations into emerging economies in hope for better returns.
Thus,QE leads to increase in $ supply, esp in developing economies. But these inflows are 'primarily' in form of FIIs (cheap foreign loans by corporate houses is a less potent component in affecting money supply) which are highly volatile & thus affect exchange rate, liquidity (& inflation too). e.g. with the announcement of start of QE3 in US sometime in september 2012 along with FDI in MBR announced by GoI, INR appreciated upto 51.6 in oct 2012 on account of huge FII inflows. But it later depreciated to ~54-55 due to our ever increasing CAD & higher demand of $ for oil & gold imports etc.
Now, as pointed out by @vishalJ & @attaboyankit its the unwinding/reversal of QE that partially contributes to rupee depreciation. Recently speculation of unwinding of QE3 leading to FII outlows led INR to touch its all time low 4 days back. Other Asian currencies felt the heat as well. Downward pressure on INR is also because of other factors like widening of trade deficit, domestic inflation, strengthening of $ itself etc etc.
the percentage of both, the rise of protein oriented diet in normal food and the fall in the contribution of expenses towards food in somehow same, so what is the reason of Inflation? :-/ Provide your views
@Vazu if I am not wrong then then you are referring to pg 88 of economic survey, right? Though I can quote main reasons for food inflation but I first want to comprehend your argument here. I fail to understand your argument of % componential rise/fall & inflation. can you please explain the question once more?
Kudos to you for starting this thread . A much needed one!!!
the percentage of both, the rise of protein oriented diet in normal food and the fall in the contribution of expenses towards food in somehow same, so what is the reason of Inflation? :-/ Provide your views
@Vazu if I am not wrong then then you are referring to pg 88 of economic survey, right? Though I can quote main reasons for food inflation but I first want to comprehend your argument here. I fail to understand your argument of % componential rise/fall & inflation. can you please explain the question once more?
Kudos to you for starting this thread . A much needed one!!!
Yes, right, Though i read about same percentage change in different article but ES(2012-13) state the same thing, At the same page number we see that the share of food consumption in total decreased from 51.34% to 27.17% in last 52 years and for same time period the share of expenditure on protein foods increased from 26.xx% to 33.71%,
Here in both cases the percentage variation in approx 50% and further if you workout, you will find that share of protein oriented expenditure in overall expenditure of a household is decreased, Its share increased in food consumption but decreased in overall expenditure.
So, if the smaller amount money is chasing same goods then how it cause inflation it must caused deflation, there must be some other reason.
I hope you got my point, my concern is as they have stated the above mentioned reason as the only one but other reports on internet+PM's speech on FDI stated supply chain the main cause.
@Vazu Agreed that Supply side constraint is the main cause of food inflation infact it should be the main answer theme but the switch over to protein rich diet is also one of major cause as -
India's production in protein rich food is not as large as compared to cereal ( though one may argue that India is largest producer in products like milk but the production is low if you consider what shall be the demand of these production per capita )
Secondly your deduction that the share of expenditure on protein diet has decreased wrt the overall expenditure thus it is not cause for food inflation is flawed from my view point as earlier we had very low per capita income but now india's per capita income have increased significantly (in last 60 yrs) so since the base has increased the percentage wise share on food is bound to go decrease ( Its base effect) . So we can't deduce that it is not cause for the inflation in food sector.
Secondly your deduction that the share of expenditure on protein diet has decreased wrt the overall expenditure thus it is not cause for food inflation is flawed from my view point as earlier we had very low per capita income but now india's per capita income have increased significantly (in last 60 yrs) so since the base has increased the percentage wise share on food is bound to go decrease ( Its base effect) . So we can't deduce that it is not cause for the inflation in food sector.
Regarding your statement on income, everything increased from income- production-per capita income-everything,
Secondly, Increase in income must have increased the prices of all, lets say in 1950 per capita income was 100 with your protein food consumption was around 13% which gives Rs 13 and 83 for other consumption , In 2012 per capita income become 20000 with 12% protein food consumption giving Rs. 2400 leaving 17600 for other consumption, so if increase in income is giving rise to price of protein food it must have given others as well.
Assumption: Savings=0
But ES says "Protein food is the ONLY reason"
My point is "how its rational to tag protein food as the MAIN/ONLY reason for Inflation" must be another reason
@Vazu As I have stated that main reason is supply side mgmt constraints. It doesn't matter if stated otherwise in economic survey . Protein and other food items are secondary cause .
Third you already have figured out why there was not rise in other items and only food sector because the percentage of saving has increased ( you have assumed 0) . So you know the fault .
@Aurelio Tight monetary policy helps in controlling demand pull inflation and not cost push inflation. The main problem of food inflation ( in India ) is cost push inflation so increasing interest rates would not provide any fruitful solution to this problems. However it may lead to control other aspects of inflation like due to manufactured food items etc
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Comments
I can only say that QE reduce the interest rates in US/Japan, which attract business houses of emerging countries to borrow money from them, so QE is filling money in emerging economies, which cause two effects, first of decrease in rupee in International market as you have to convert those dollars in rupees to invest in India and further the increase of money supply in DOMESTIC cause Inflation.
and thats' the reason, in India they need permission of RBI to go for such transactions as it will impact liquidity(read Money supply) of the country.
Regarding depreciating rupee value, i don't think so, as both are complementary in nature and basic law of economics say that the supply of one will increase the value of other.
http://www.moneycontrol.com/news/rupee/rupee-fall-unique-dont-see-rbi-steppingsoon-kotak-bk_895048.html
Check the above link, as its the withdrawal of QE which is scaring the Indian think-tank.
Central banks resort to QE (which is an unconventional monetary policy measure employed occasionally during recessionary phase) when even ~0 % interest rate fails to stimulate the growth. QE increases the money supply in the system by means of large-scale asset purchases by the central banks, such as corporate bonds or mortgage backed securities. The main aim of this newly injected liquidity is to increase lending, investment, create jobs & consumption. Obviously a long term disadvantage is high inflation
During 2008-09 QE (in the form of stimulus packages) helped both developed & developing countries alike. Apparently emerging economies regained the growth momentum however developed economies like G4 still faces stagnation, high unemployment rates & inflation too. Thus, with excess liquidity & stagnant economy at home it was evident that huge capital would flow out of these nations into emerging economies in hope for better returns.
Thus,QE leads to increase in $ supply, esp in developing economies. But these inflows are 'primarily' in form of FIIs (cheap foreign loans by corporate houses is a less potent component in affecting money supply) which are highly volatile & thus affect exchange rate, liquidity (& inflation too). e.g. with the announcement of start of QE3 in US sometime in september 2012 along with FDI in MBR announced by GoI, INR appreciated upto 51.6 in oct 2012 on account of huge FII inflows. But it later depreciated to ~54-55 due to our ever increasing CAD & higher demand of $ for oil & gold imports etc.
In case you haven't already read then please refer to Box 6.2 , Box 6.5 , point 6.37 (pg142) of economic survey for better understanding of the concept.
Also http://www.ipsnews.net/2013/06/quantitative-easing-impact-on-emerging-and-developing-economies/
Now, as pointed out by @vishalJ & @attaboyankit its the unwinding/reversal of QE that partially contributes to rupee depreciation. Recently speculation of unwinding of QE3 leading to FII outlows led INR to touch its all time low 4 days back. Other Asian currencies felt the heat as well. Downward pressure on INR is also because of other factors like widening of trade deficit, domestic inflation, strengthening of $ itself etc etc.
Kudos to you for starting this thread
Though i read about same percentage change in different article but ES(2012-13) state the same thing, At the same page number we see that the share of food consumption in total decreased from 51.34% to 27.17% in last 52 years and for same time period the share of expenditure on protein foods increased from 26.xx% to 33.71%,
Here in both cases the percentage variation in approx 50% and further if you workout, you will find that share of protein oriented expenditure in overall expenditure of a household is decreased, Its share increased in food consumption but decreased in overall expenditure.
So, if the smaller amount money is chasing same goods then how it cause inflation it must caused deflation, there must be some other reason.
I hope you got my point, my concern is as they have stated the above mentioned reason as the only one but other reports on internet+PM's speech on FDI stated supply chain the main cause.
Agreed that Supply side constraint is the main cause of food inflation infact it should be the main answer theme but the switch over to protein rich diet is also one of major cause as -
India's production in protein rich food is not as large as compared to cereal ( though one may argue that India is largest producer in products like milk but the production is low if you consider what shall be the demand of these production per capita )
Secondly your deduction that the share of expenditure on protein diet has decreased wrt the overall expenditure thus it is not cause for food inflation is flawed from my view point as
earlier we had very low per capita income but now india's per capita income have increased significantly (in last 60 yrs) so since the base has increased the percentage wise share on food is bound to go decrease ( Its base effect) . So we can't deduce that it is not cause for the inflation in food sector.
Secondly, Increase in income must have increased the prices of all, lets say in 1950 per capita income was 100 with your protein food consumption was around 13% which gives Rs 13 and 83 for other consumption , In 2012 per capita income become 20000 with 12% protein food consumption giving Rs. 2400
leaving 17600 for other consumption, so if increase in income is giving rise to price of protein food it must have given others as well.
Assumption: Savings=0
But ES says "Protein food is the ONLY reason"
My point is "how its rational to tag protein food as the MAIN/ONLY reason for Inflation" must be another reason
PS - I am weak in English. I hope you understand the question.
As I have stated that main reason is supply side mgmt constraints. It doesn't matter if stated otherwise in economic survey .
Protein and other food items are secondary cause .
Third you already have figured out why there was not rise in other items and only food sector because the percentage of saving has increased ( you have assumed 0) . So you know the fault .
You are absolutely right for the main cause
Tight monetary policy helps in controlling demand pull inflation and not cost push inflation.
The main problem of food inflation ( in India ) is cost push inflation so increasing interest rates would not provide any fruitful solution to this problems.
However it may lead to control other aspects of inflation like due to manufactured food items etc