Decentring Fiscal Deficit Target Numbers

You can find my article in the Economic & Political Weekly of 09-05-2015.  Or follow this link:

independent.academia.edu/SashiSivramkrishna

The article questions the obsession with fiscal deficit traget numbers like 3.1% of GDP or 3.6% or 3.9%. Does it really matter?  Should it be the goal of macroeconomic policy??

The conventional circular flow and endogenous money

Once again a report in the Livemint of 27-11-2014 caught my attention;

“Perhaps the reason we have been so willing to protect the borrower against the creditor is that the hated moneylender looms large in our collective psyche. But the large borrower today is not a helpless illiterate peasant and the lender today is typically not the sahukar but the public sector bank. In other words, we are the lender,” said Rajan in his speech on Tuesday, adding that when the large promoter defaults wilfully, he is essentially robbing the taxpayer and making it costlier to fund new investment in the economy.*

This sounds so much like the conventional circular flow reasoning - that deposits come before lending.  Endogenous money questions this view; loans create deposits.

I am not questioning the fact that growing NPAs are a cause of concern but simply raising the point that economists still cling to the conventional view that banks use savings to lend just like the moneylender.


* Read more at: http://www.livemint.com/Money/TaNyxECKa6pbuWYuS7vAaN/RBI-ready-to-give-more-flexibility-in-recasting-distressed-l.html?utm_source=copy