As Urjit Patel sheds ‘hawkish’ image, what are hawks and doves?
The new RBI governor Urjit Patel, earlier dubbed a “hawk”, is being termed a “dove” after he put forth his view on inflation and growth in his meeting with economists last week. If you are wondering how birds got entangled in monetary policy, read on:business Updated: Sep 27, 2016 21:31 IST
The new RBI governor Urjit Patel, earlier dubbed a “hawk”, is now being termed a “dove”, after he put forth his views on inflation and growth in his meeting with economists last week. If you are wondering how birds got entangled in RBI’s monetary policy, read on:
When did the terms – dove and hawk – originate?
The terms dove and hawk are deployed in the times of conflict, to describe those against and those in favour of confrontation. According to Tim Sablik of Federal Reserve of Richmond, the terms “hawk” and “dove” have commonly been used by the financial press to describe Fed policymakers since the 1980s, and the term “inflation hawk” can be found as far back as the late 1960s.
For the US, the 1960s started off with the Cuban Missile Crisis and ended with a spike in inflation to double-digit levels. The former saw frequent use of the terms to describe those advocating peace (doves) and those advocating conflict (hawk).
But what does a dove mean, in terms of monetary policy?
The terms – dove and hawks – derive their reference in this case from the basic mandate of monetary policy of aiming for price stability, maximum employment and moderate long-term interest rates.
This mandate is followed by most Central Banks in the world, though it may be spelt out in not so similar terms. For instance, according to the Reserve Bank of India (RBI) Act the primary objective of the monetary policy is to maintain price stability, while keeping in mind the objective of growth, and to meet the challenge of an increasingly complex economy.
A dove is widely considered to be someone who favours a monetary policy that aids growth while allowing prices to rise – also called inflation.
Who is a hawk?
A hawk, on the other hand aims to stabilise prices at the expense of growth.
The problem with the terminology, when being used for central bank officials, is that they are primarily based on the personal views of the bankers on the direction of monetary policy. So a dove today may become a hawk tomorrow.
According to Ryan Avent of The Economist, “We could define hawks and doves in terms of the extent to which price stability is central to their theory of what an optimal monetary policy would look like”.
How are price stability and growth related?
Price stability means low and stable inflation. In the short-term it is related to growth through the amount of money that is present in the economy.
Prices fall when the demand of a product is lower than its supply. This leads to lower revenues for companies, who in turn invest less in production so that the supply can fall to a level where prices can rise again. Since production is declining, the growth of the economy – which is calculated as change in the total value goods sold – falls.
Meanwhile, prices rise when demand outstrips supply. In this case companies are incentivised to raise production. Higher production leads to higher employment, which lead to higher demand for goods and thus more growth.
Where does RBI enter this picture?
People and companies need money in order to buy goods and invest. This money is supplied by banks, which in turn borrow money from the RBI.
The RBI lends short-term (for a period of less than 15 days) money to the banks at the repo rate. If this rate, which is 6.5% now, is reduced banks will be able to lend further at lower interest rates.
When companies clamour for a rate cut, they want a reduction in repo rate, so that they can borrow money at cheaper rates to invest.
So, is the new governor a hawk or a dove?
Urjit Patel has been termed a hawk because he was instrumental in putting in place inflation targeting at RBI. But recently he advocated the use of the 2% band above and below the 4% target, to meet growth objectives, which is a departure from his earlier days as RBI deputy governor when he maintained a strong stance on price stability.
In his meeting with economists last week, Patel downplayed inflation risks, GST effect on price rise and stressed that growth is the focus of RBI. That would make him a dove.
But, a concrete label would require time as Patel is yet to present his first monetary policy, which will also be the first for the Monetary Policy Committee (MPC).
In the US, the Federal Reserve Open Market Committee (FOMC), their equivalent of the MPC, routinely publishes its minutes so the labelling can be done based on the policy action of the members rather than their just views.
As economist and US Fed official William Poole (a self-confessed hawk) said, “When you get to an FOMC meeting, you have to make a decision given the best information you have. You need to be ready to change your mind, but you can’t just say ‘I’m going to wait until we do more studies.’ That may work for an academic, but it won’t work for a policymaker.”
Graphic: Ornithology of central banks
A way to separate a dove from a hawk is from their standpoint on inflation. The former is at peace with a little price rise while the latter is not.
India’s monetary policy committee
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