##s to calibrate the flows ; in essence they define the boundaries of the playing field. tactical controls, on the other hand, introduce barriers into the playing field itself. they are deployed opportunistically to stem a surge in inflows or outflows. by their very nature, tactical controls introduce a new element of uncertainty into the calculations of both domestic and foreign stakeholders. india ’ s approach to capital account management is typically strategic. for example, we have an explicitly expressed preference for long term over short term flows and equity over debt flows, and we have used both price based and quantity based controls to operationalize this policy. we have, of course, periodically recalibrated elements of the strategy in pursuit of capital account liberalization. an important lesson from india ’ s experience is that even with relatively large swings in capital flows during the crisis, the pressure to use tactical controls did not build up because the strategic controls provided automatic buffers. even as we debate what emes should or should not do to manage excess capital flows, we should remember that to the extent that lumpy and volatile flows are a spillover from policy choices of advanced economies, managing capital flows should not be treated as an exclusive problem of emerging market economies. how this burden is to be shared raises both intellectual and practical challenges. the intellectual challenge is to build a better understanding of the forces driving capital flows, what type of policy instruments, including capital controls, work and in what situations. the practical challenge is the need to reach a shared understanding on a framework for cross border spillovers of domestic policies in capital - originating countries, and the gamut of policy responses by capital receiving countries. lesson 7 : economics is not physics a few months into the crisis, the queen happened to be at the london school of economics and asked a perfectly sensible question : “ how come none of the economists saw the crisis coming ”. the queen ’ s question resonated with people around the world who felt that they had been let down by economics and economists. as economists saw their profession discredited and their reputations dented, the economic crisis soon turned into a crisis in economics. what went wrong with economics? it now seems that by far the most egregious fault of economics, one that led it astray, has been to project it like an exact science. the charge is that economists suffered from “ physics envy ” which led them to formulate elegant theories and models – using sophisticated mathematics with

spf ) is another important source to gauge the inflation expectations from analysts. the survey is usually used for forecasting a large variety of macroeconomic variables in addition to inflation, viz., gross domestic product ( gdp ), interest rates and the unemployment rate. as professional forecasters process large volume posen, adam ( 2011 ), ‘ the soft tyranny of inflation expectations ’, oxonia distinguished lecture, oxford, february 22. bis central bankers ’ speeches of information and rely on econometric models, their forecast of inflation expectations can be considered more rational than that of pure households. measures of expectations in india i now turn to issues pertaining to measurement of inflation expectations in india. in the recent years, the reserve bank has been assessing the state of inflation expectations in the indian economy through several means. it conducts a series of surveys aimed at different economic agents as well as model based inflation forecasts ( table 1 ). these surveys have evolved over time with periodic refinements. let me give you some perspective on these surveys. table 1 survey - based inflation expectations first, the reserve bank has been conducting a survey of inflation expectations of households since september 2005 to get a measure of the public pulse on inflation. the initial rounds of the survey were only qualitative in nature and from the 3rd round, questions about expected rate of inflation over the next three months and next one year were added. from the 9th round in september 2007, a question on the respondents ’ perception of the prevailing inflation rate was also added. a question on awareness of the public on the rbi ’ s role to control inflation was added in the 21st round in september 2010. second, the survey presents a measure of households ’ present perception of inflation as well as their expectations about the near future. the inflation expectations survey of households is conducted in twelve cities, three each from the north, south, east and west zones covering the major metros from each zone and eight other cities. the 4, 000 respondents are chosen within a city in such a manner that a good geographical and occupational coverage is achieved. the price expectations are sought in the survey for general prices and for five groups : food products, non - food products, consumer durables, housing and services. bis central bankers ’ speeches third, the reserve bank ’ s consumer confidence survey gives an assessment of the consumer sentiments on prices, as it is an important variable influencing the overall consumer confidence. the overall consumer confidence is assessed on the basis of respondents perceptions of the general