## Thursday, February 13, 2014

### Inflation targeting is the new gold standard

1. Hi Ajay,

I enjoyed this article, but was wondering what you thought about alternatives such as real exchange rate targeting. I once had a very brief conversation with Charles Goodhart who thought that this might be a better option for emerging markets.

1. Monetary policy can peg to nominal things. It can't peg to real things.

E.g. you can't tell a central bank that we have a 10% GDP growth target.

2. I guess I was not clear enough. I was thinking of something like this: http://ideas.repec.org/a/mes/postke/v28y2006i4p573-591.html
(ungated version here http://www.itf.org.ar/pdf/documentos/54-2006.pdf)

1. I am generally risk averse and stick to mainstream and orthodox prescriptions. :)

I really think it's wonky to use nominal tools to manage real things.

3. I'm interested in knowing if there is any credibility of frameworks like sharia banking in which interest rates are deemed evil (although, I don't think true sharia banking exists anywhere at the moment). I came across some arguments about how interest rates are basically rents enforced by the central bank and I couldn't quite make out head or tail of the argument. Can't find any literature on this either. Is it just a loony bin theory against a certain community or is there any credible theory that supports non-interest rate based banking? Why should banks charge interest rates on loans rather than have some kind of partnership, or transaction fee? The argument made is that banks aren't really doing any work in making loans, other than doing credit checks, so why are they entitled to an interest rate? Why is time value of money considered to be a basic, unquestioned concept? I'm confused.

4. Hi Dr. Shah,

I have an article on Firstbiz that builds on your argument. It can be found here.

http://www.firstbiz.com/economy/monetary-policy-rbi-just-target-cpi-asset-price-changes-77269.html

Would be a pleasure to hear your views on it. Thanks

Please note: Comments are moderated. Only civilised conversation is permitted on this blog. Criticism is perfectly okay; uncivilised language is not. We delete any comment which is spam, has personal attacks against anyone, or uses foul language. We delete any comment which does not contribute to the intellectual discussion about the blog article in question.

LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.