Policy responses to Covid-19 have been a mix of fiscal and monetary policy – with the latter doing the heavy-lifting in both developed and developing countries. Against this backdrop, in this edition of I4I Conversations, Viral Acharya (NYU Stern School of Business) and Amartya Lahiri (University of British Columbia) discuss the potential distortions of using ‘band-aids’ instead of structural reforms for a prolonged period, in the context of international financial architecture, particularly with reference to India.
Prof Acharya explains that as the lever of public support through central banks – by using their balance sheets during large shocks for palliative quick fixes, albeit without forward guidance in terms of an exit plan – is getting larger and larger, potential mispricing of risk, inefficiencies in capital and credit allocation, and high levels of public debt resulting in the crowding out of the private sector, loom large – particularly in emerging markets. Further, using the fiscal toolkit when multipliers are questionable and showing forbearance to the banking sector during financial crises may result in evergreening in the private sector, and zombie lending may in turn result in low growth. Acharya and Lahiri also deliberate upon the disproportionate benefit of rate cuts and the liquidity glut to the consumption of the very wealthy, calibrating capital controls with macroeconomic stability, and the importance of foreign direct investment for stable outcomes in the external sector. They then focus on the Indian context, foraying into the disconnect between burgeoning start-ups and a grim job market, factors inhibiting the growth of brick-and-mortar industries, the move towards formalisation in the post-pandemic period, education and vocational training not supporting the transition from farming to non-farming sectors, the perception of India being ‘sui generis’ and the danger of remaining in the middle pack of emerging economies, and deviating from macroeconomic and financial stability targets with ease.
This edition of I4I Conversations was recorded on 10 February 2022.
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