driven those economies. so that ’ s the model that the government is trying to put in place. it is doing a number of things to sustain that model in terms of the macro - economic policy making. have been put in place. there are three frameworks that the government has a revenue page 2 of 17 enhancement - based fiscal consolidation program which is intended to bring the budget deficit down to 3. 5 % of gdp by 2020. the central bank is putting in place a flexible inflation targeting framework which is intended to bring about monetary policy formulation which is pro - active and forward - looking. today ’ s interest rates, i. e. when setting interest rates today, the full passthrough effects of the transmission does not have full effects in the system for about twelve months. so, in setting interest rates today we have to have an educated view of what inflation is going to be in twelve months ’ time. in the past, we tended to do too little too late. we allowed the economy to overheat and then we would move. this is why we have had big fluctuations in our interest rates which have made business planning very difficult. we are trying to put in place a framework which will now enable us to set forward - looking, pro - active monetary policy, which should smooth out these sharp fluctuations in interest rates. they will still go up and down, but you won ’ t get the spikes and troughs that we have had in the past, if we are able to implement the flexible inflation targeting regime properly. that ’ s what we are trying to do. equally, on the exchange rate, in the past, we tried to defend an over - valued exchange rate. we used depleted borrowed foreign reserves to do that. in doing so, we lost a large amount of foreign reserves and then eventually there was an inevitable sharp page 3 of 17 depreciation in due course. this doesn ’ t make any sense, so we are trying to follow a more flexible exchange rate policy, which will, we hope, enable us to have a competitive and stable exchange rate. if we get fiscal policy and monetary policy right, then the pressure on the exchange rate is reduced. so that ’ s crucial. you have to take all three macro - economic instruments together. if you are able to implement the other two macro policies well, then there won ’ t be pressure on the exchange rate and it will be possible to have a competitive and relatively stable exchange rate, which is what we

is 5 ), the seed or reserve money produced by central banks is also called “ high powered money ”. thus, the total money in an economy would be much more than what a central bank would issue to the economy. when that money which is known as money supply chases after the limited availability of goods and services, the general price level would elevate to a higher level. if it happens continuously, inflation sets in an economy imposing an inflation tax on the society. why is there a preference for inflation tax? there is a general preference for inflation tax for several reasons. first, it is easy, quick and convenient to borrow from the central bank, compared to conventional forms of taxes available to a government. such conventional taxes need to be backed by legislation, take time to generate the tax revenue and have to be enforced by an elaborate tax administration. it also runs the risk of failing to generate the required revenue due to tax evasion and avoidance. but, borrowing from the central bank is just a single transaction and the treasury could use it immediately for making payments. second, because of the limitations of the tax bases in developing countries, there is resource paucity for governments to undertake much needed infrastructure projects. hence, it has been argued that the governments in developing countries could initiate the development efforts by mobilizing resources through inflation. the initial inflation so created would get reversed once the new economic development increases the production of goods and services and raises the market supply. so, inflation would become a self - destroying process and, therefore, it is argued that there is no danger of using inflation for economic development. third, taxes are mandatory payments and therefore, there is resistance on the part of tax payers to pay the taxes. because of the pressure coming from the lobbying groups, political authorities too sometimes are unwilling to raise the tax rates to generate higher tax revenue. however, the resistance of the citizens to inflation tax is virtually nonexistent. this is because no one realizes that they are paying a tax to the government, when the prices move up. any resistance by them is not against the inflation tax per se, but against the inflation. that again takes place after sometime when they have been very badly hit by inflation. fourth, inflation is said to be bringing about some salutary effects to an economy from the point of view of its long term growth. it re - distributes income in favor of the rich people who normally save a greater proportion of their income than the poor people.