purchase. 27. in the uk, a battle of ideas is playing out on how to revive the sagging economy. the government has firmly embraced a fiscal consolidation plan, but the private sector is yet ben s bernanke, “ japanese monetary policy : a case of self - induced paralysis ”, institute for international economics, special report 13, september 2000. olivier blanchard, giovanni dell ’ ariccia, and paolo mauro, “ rethinking macroeconomic policy ”, imf staff position note, february 12, 2010. paul krugman, “ earth to ben bernanke : chairman bernanke should listen to professor bernanke ”, new york times, august 24, 2012. esther l george, “ the us economy and monetary policy ”, federal reserve bank of kansas city. bis central bankers ’ speeches to take up the slack left by the government and demand is yet to revive. the burden of stimulating the economy has therefore fallen on the bank of england ( boe ), an inflation targeter, which found itself consistently overshooting its inflation target over several successive months till mid - 2012. 28. this policy context has triggered a debate in the uk on whether inflation targeting is an appropriate policy stance in the face of unyielding recession. one option as suggested by mark carney, soon to be boe governor, is that central banks could consider targeting nominal gdp instead of inflation. nominal gdp targeting, by reducing uncertainty about how long monetary policy will stay easy, allows a central bank to persist with an accommodative monetary stance to stimulate growth even if inflation is above its comfort level. this is not costless though. it increases uncertainty about future inflation and can therefore potentially unhinge inflation expectations from their anchor around the targeted inflation. 29. even as these debates about a new normal for inflation are becoming more commonplace around the world, the context similarity between india and advanced economies should not be stretched. the concern in advanced economies is about how to continue with the stance of monetary easing even after the policy interest rates have hit the zero lower bound so as to minimize loss of employment and output. the concern in emerging economies in general, and india in particular, on the contrary, is an aspiration for higher growth aimed at poverty reduction, even if it entails higher, albeit not much higher, inflation. it is important to acknowledge this vital difference in evaluating the arguments for and against a higher “ normal for inflation ”. why is it

there is also an important conceptual argument against the “ new normal ” hypothesis. as india ’ s integration with the world picks up pace over the next decade, it is important also that our inflation rate is in line with global inflation. a new normal based entirely on domestic considerations will result in a permanent wedge between domestic and global inflation which means a persistent real appreciation of currency. real appreciation is unambiguously contractionary and militates against our growth aspiration. to support sustainable growth during a period when the economy is globalizing, our inflation rate needs to converge with the global inflation rate. this is the rationale behind the reserve bank ’ s policy of calibrating its medium term inflation goal to global inflation. 51. this is an appropriate context for me to respond to the argument for a new normal based on the ppp convergence argument. our view on this is that ppp convergence cannot be a policy goal, and accepting higher inflation to aid ppp catch up will be both futile and indefensible. as india ’ s per capita income rises, ppp convergence will happen automatically. we need to make sure that rise in incomes is accompanied by productivity gains so that the process of ppp catch up is non - inflationary. 52. there is also no a priori reason to believe that the entire burden of adjustment on account of integration with the global economy will have to come by way of the price differential closing. part, if not all, of the burden can be borne by exchange rate adjustment too as evidenced by the experience of japan starting the 1960, when the yen appreciated by over 300 per cent to close the price gap. how the burden of adjustment is shared between price levels and exchange rates will depend on country circumstances – in particular the economy ’ s structural constraints and market rigidities. 53. to support sustainable growth during a period when the economy is globalizing, our inflation rate needs to converge with the global inflation rate. we need to manage this convergence by calibrating the “ inflation differential ” over time rather than acquiescing in a new normal for inflation. conclusion 54. admittedly, the average inflation rate in india over the last three years has trended up. nevertheless, the context presents neither a necessary nor a sufficient condition for the reserve bank to revise its inflation goal. not a necessary condition because, as indicated earlier, much of our inflation is driven by supply constraints which can be corrected by appropriate policies and their effective implementation. accepting a new