There is some thing common between Ben Bernanke and Stan Fisher. Their policy choices have largely been driven by their academic research. The Fed’s monetary easing—unprecedented in size and duration—did not come out of accepted central banking principles. Rather, it was from Bernanke’s academic work on the Great Depression and Japan’s near-permanent recession which argued that, in a crisis, liquidity cannot be drip-fed, it needs to be overwhelming. Since the late 1980s, Stan Fisher’s research has underscored the importance of monetary policy targeting inflation and keeping inflationary expectations under wraps. When the Bank of Israel raised interest rates, it did so aggressively such that it remained ahead of the curve ensuring that inflationary expectations remained anchored. So, when it was time to ease, the central bank found ample space to do so just as aggressively. That’s the story of Bank of Israel’s monetary policy in the last five years.
In India, we have largely abandoned basing policy and reforms on theory and empirical evidence. Instead, we have chosen to justify badly structured ad hoc policy changes on pragmatism and reality. We chose to change interest rates in gradual steps so that banks could adjust to these changes discarding three decades of theory and research that have consistently pointed out that the only way monetary policy affects the real economy is if banks cannot pre-empt the policy changes. The only time the market was truly surprised was when this July interest rates were effectively hiked 300 basis points one Monday night. But, almost immediately, RBI and the government undermined the rate hike through (perhaps unintended) administrative actions.
In the growth mayhem of the last three years, only the household sector managed to preserve its balance sheets by avoiding equities and real estate and investing in gold. Rather than laud the households for good judgement, we raised import duty on gold to lower the burgeoning current account deficit. But it wasn’t a current account problem. It was capital outflow that just took the form of imported gold because households did not have any other safe asset to invest in. But, instead of raising the