How doves and hawks fly in monetary policy
NEW DELHI: The new RBI governor, Urjit Patel, previously dubbed a “hawk”, is being termed a “dove” after putting 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 hawk and dove are used in times of conflict, to describe, respectively, those in favour and those against confrontation. According to Tim S ab lik of Federal Reserve of Richmond, the terms “hawk” and “dove” have commonly been used by the financial press to describe Fed policy makers since the 1980s, and the term “inflation hawk” can be found dating 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?
In this case, dove and hawk derive their reference from the basic mandate of monetary policy—of aiming for price stability, maximum employment and moderate longterm interest rates.
This mandate is followed by most central banks around the world, though it maybes pelt 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 at the same time keeping in mind the growth target, and to meet the challenge of an increasingly complex economy. An inflation dove is widely considered to be someone who favours a monetary policy that aids growth while allowing prices to rise–also called inflation.
And who is a hawk?
A hawk aims to stabilise prices, even at the expense of growth.
The problem with the terminology, when being used to refer to central bank officials, is that they are based on the personal views of the bankers on the direction of monetary policy. So a dove today may well turn a hawk tomorrow.
According to Ryan A vent 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 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, which 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 – calculated as change in the total value goods sold – falls.
Meanwhile, prices rise when demand outstrips supply. In this case companies are inc en ti vised to raise production. Higher production leads to higher employment, which leads to higher demand for goods, and thus, more growth.
Where does the RBI enter this picture?
People and companies need money in order to buy goods and make investments. This money is supplied by banks, which in turn borrow 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 more at lower interest rates.
When companies cl am our for a rate cut, they want a reduction in there po rate, so that they can borrow at cheaper rates to make their investments.
So the moot question: 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.
This is a departure from his earlier days as RBI deputy governor, when he had an unyielding stance on price stability.
In his meeting with economists last week, Pa tel downplayed inflation risks and a possible GST impact on prices, and stressed that growth is the focus of RBI. That verily makes him a dove.
But a clear label ling would take time. Pa tel 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( F OM C ), the country’s equivalent of the MPC, routinely publishes its minutes, so labelling members on the basis of policy action, rather than their views, is relatively simple.
As economist and US Fed official William Poole( a self-confessed hawk) said, “When you get to an F OM C meeting, you have to use the best information. You need to be ready to change your mind.”