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Constructive Thoughts for the Day
Constructive Thoughts for the Day
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Tuesday , April 8 , 2008
Policy coordination to attack the inflation problem
Posted by Kriengsak , Reader : 2312 , 11:00:34   | Category : Economy  
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          Due to present sky-high oil prices, all countries are in double jeopardy; not only do they face slowing economic growth, but there will also be a significant increase in their consumer price index, the so-called inflation.
 
          Though these threatening situations have not predicted a crisis yet, they present economists and policymakers with a policy dilemma, as any fiscal or monetary policy which aims to attack a problem will exacerbate another.
 
           Each time an inflation problem occurs, the people will call on the Ministry of Commerce to launch some commodity price curbing measure. However, in my opinion, the Ministry of Commerce should not be the sole organization responsible for the inflation problem. Furthermore, inflation policy should not be spearheaded by the Ministry of Commerce.
 
          According to macroeconomic theory, inflation may be caused by excessive money supply or by aggregate demand. Therefore, those organizations that are able to solve the inflation problem are likely either to be the Bank of Thailand, or else the Ministry of Public Finance. However, since current inflation is obviously caused by an increase in oil prices, in principle, it should be the Ministry of Energy that takes responsibility for the current inflation problem, carrying as it does suitable policy instruments to manage those oil prices.
 
          Nevertheless, the Ministry of Public Finance and the Ministry of Energy have no commitment to solve the inflation problem, while the Ministry of Commerce, which has no efficient policy instruments, is in charge of it. Consequently, the Minister of Commerce has to “do something”, under his own policy instruments, in order to moderate public fury.
 
          Unfortunately, that “something” that the Minister of Commerce does, may not be “the best thing.” Due to a scarcity of policy instruments, the Ministry of Commerce, from the past until now, has adopted price control measures; although, historically, it has always failed to tackle the root of the inflation problem.
 
          There are many ways to control prices. Sometimes the Ministry of Commerce may ask producers to cut their prices, which does not seem to work due to the profit-maximizing nature of business. Compulsory price control is considered to be market distortion. Because of compulsory price control, producers will restrain their production level, causing consumers to suffer supply shortage, followed by the birth of the “black market,” a situation in which consumers are unable to find controlled price goods and must then buy goods at a higher price than those at a controlled level.
 
          Thus, policy coordination is necessary to attack the inflation problem efficiently, because other ministries have more efficient policy instruments and cooperation will make policy congruence between each ministry.
 
In fact, policy coordination is really not a brand new idea. In Thailand, this concept was initiated by Dr Puey Ungpakorn when he founded the Fiscal Policy Office, officially functioning to form policy coordination among organizations having different goals. Regretfully, macroeconomic policymakers after Dr Puey’s time did not concentrate on this function.
 
In my article, I will now propose some practical examples of policy coordination that is able to attack the inflation problem. These plans lie in the adoption of Public Finance Ministry policy instruments, of which there are many efficient policy instruments.
 
          The first policy instrument of the Ministry of Public Finance is tariffs, which play a major role to maintain the gap between local price and world price. Where local price is high, a decreased tariff rate will lead to the decreased price of imported goods. As a result, local producers must cut their prices. Moreover, where tariff rates are reduced on imported goods which are raw materials or on intermediate goods of a local kind, the production cost of those local goods will decrease and, consequently, their prices will decrease.
 
          Nonetheless, the Thai government must think prudently before changing tariff rates because this will affect the benefit distribution among interest groups. For example, when the government waived four percent of import tariffs on soybean meal (SBM), the beneficiaries were the local animal feed producers. However, with the decreased price of imported SBM, soybean oil producers had to cut their SBM selling price accordingly. Eventually, consumers were possibly able to benefit from the lower price of pork, but it may have been offset by soybean oil producers turning to make a soybean oil profit by raising prices to compensate for their profit loss from lower SBM prices. The government also lost a tariff revenue from SBM.
 
          Negative tax is another measure able to alleviate the effects of inflation, as I mentioned last week. Besides being an economic stimulus, negative tax also supports the poor during time of hardship. In practice, the government may consider raising the value of tax refunds to the poor, so that they are able to pay for their daily necessities.
 
          While increasing private sector money will truly raise aggregate demand and, consequently, increase the inflation rate, if the Ministry of Public Finance has good policy management, the inflation problem may not deteriorate much. Tax refunds should be paid only to low-income groups or to people with many dependants, but not to all. The tax refund should not support the full burden of inflation; but its recipients must bear part of the burden. Thus, negative tax measures will not so greatly increase the aggregate demand that significantly impairs the inflation problem. 
 
          In addition, additional tax refunds should be paid only if people suffer from severe inflation. As long as the government does not adopt this measure regularly, producers will not raise their prices since they will expect the permanent income of consumers to be still unchanged. Thus, I believe that the negative tax measure will likely be more effective in tackling inflation than will the price control measure.
 
          Besides tackling the inflation problem, however, the Thai government should initiate policy coordination to regulate other macroeconomic goals also. I somehow wish that macroeconomic organizations could reach agreement on the desirable picture of Thailand’s economy, before then jointly taking responsibility for each goal and formulating more harmonious policies.

Read comment

comment 11
Kriengsak date : 17/04/2008 time : 10.28
http://blog.nationmultimedia.com/kriengsak

Thank you for good comments.
comment 10
Tawan date : 08/04/2008 time : 19.16
http://blog.nationmultimedia.com/tawan3

Thank you Khun Ian.
It is amazing how different markets also due to different regulations.
I read that the London Stock Exchange has been listing 10 times more customers than the New York exchange.
comment 9
Ian date : 08/04/2008 time : 19.12
http://blog.nationmultimedia.com/anterian36

Tawan, in the UK there are about 4 major oil companies that dominate the market, the only differences in pump prices is between a large retailer who can bulk buy like a supermarket and the small filling station with perhaps a 10,000 gallon tank.
comment 8
Tawan date : 08/04/2008 time : 18.30
http://blog.nationmultimedia.com/tawan3

Pump petrol prices are based on spot contracts that can change many times during the trading day and thus different prices at the pump even on same street.
comment 7
Tawan date : 08/04/2008 time : 18.28
http://blog.nationmultimedia.com/tawan3


Supply and demand IMF commodities policy summary
.
Policy implications

The current commodity price boom has raised new policy issues. From a multilateral perspective, policy efforts should focus on ensuring the efficient functioning of market forces at the global level because markets for many commodities are highly integrated. In the oil market, for example, policy priorities should ensure a timely, full pass-through of crude oil price changes to end-user prices and enhance energy conservation incentives on the demand side. This would contribute to making global oil demand more price elastic, which could reduce the extent of oil price volatility in response to demand or supply fluctuations. On the supply side, reducing obstacles and policy uncertainty for oil and metals investment could help accelerate capacity buildup. At the same time, improving market statistics could help by enabling market participants to make informed decisions.

In the markets for major food crops, policies that ensure efficient and realistic use of biofuels and discourage protectionist elements will help reduce the prices of corn and edible oil. Current policies in both the United States and the European Union would have to be adjusted substantially, given large subsidies and the preference for domestic production even if it is relatively inefficient. For example, broadly accepted estimates suggest that Brazilian ethanol derived from sugarcane is less costly to produce (in energy-equivalent terms) than either U.S. gasoline or corn-based ethanol. Also, sugarcane ethanol produces 91 percent fewer greenhouse gas emissions per kilometer traveled than does gasoline, whereas the environmental benefits of corn- and wheat-based ethanol relative to gasoline are small. Therefore, a better policy would be to allow free trade in biofuels while incorporating emissions costs into prices of all fuels. In addition, there is a legitimate role for governments of all countries to fund promising research in second-generation biofuels, given that they serve as a public good.

In addition to policies that can enhance the functioning of global commodity markets, mitigating the impact of rising food and fuel prices on poor households has become a major policy concern. Motivated by worries about food security, a number of countries have resorted to protectionist measures, which may have contributed to global market tightness. For example, in 2007, a number of countries imposed export taxes on grains and lowered tariffs on edible oils. Instead, countries should consider targeted cash transfers to poor households, or temporary subsidies on a few selected food items consumed by the poor, if the first option is not possible. Similarly, instead of granting general domestic fuel subsidies, which generate considerable fiscal cost, encourage excessive energy consumption, and tend to disproportionately benefit wealthier households, many oil-exporting countries should minimize the effect of high fuel prices on poor households through well-designed and targeted safety nets.
comment 6
Tawan date : 08/04/2008 time : 18.23
http://blog.nationmultimedia.com/tawan3


Growth
comment 5
Tawan date : 08/04/2008 time : 18.22
http://blog.nationmultimedia.com/tawan3


Oil Prices
comment 4
Ian date : 08/04/2008 time : 18.18
http://blog.nationmultimedia.com/anterian36

Looking just at the oil prices, there is a familiar problem we see in England. Oil prices go up, the price at the pumps goes up. Oil prices go down, the price at the pumps stays the same.
This logic seems to apply to many other commodities, when there is a shortage the price goes up, when it goes into surplus the price does not go down.
The public are conditioned to accept price increases, but except for "special offers" never to expect price drops.
comment 3
Tawan date : 08/04/2008 time : 18.07
http://blog.nationmultimedia.com/tawan3

Taylor's Equation.

What is now called the Taylor rule was a simple equation that John Taylor presented at a conference in 1992 and elaborated on in a 1999 book:
r = 1.5p + 0.5y
where r is the deviation of the Fed’s target for the real federal funds rate from its long-run average, p is the deviation of the inflation rate from an inflation target, and y is the gap between actual and potential output. The federal funds rate is the interest banks charge each other for overnight loans of excess reserves and is the Fed’s key market tool for monetary policy.
comment 2
Tawan date : 08/04/2008 time : 18.05
http://blog.nationmultimedia.com/tawan3

Synergy and coordination and Taylor's inflation rule.

The equation that Taylor proposed was simplicity itself— so simple that Taylor was able to put it on the back of his business card (see Box 1). It said that from 1987 to 1992, the Fed’s setting of its policy instrument, the federal funds rate, had been motivated in large part by two considerations:

•How close the U.S. inflation rate was to 2 percent. If inflation inched above 2 percent, the Fed tended to raise the federal funds rate target to cool inflation.
• How far the economy’s real income was from its potential. If income was below potential, the Fed tended to lower the target interest rate to stimulate the economy.
comment 1
Tawan date : 08/04/2008 time : 14.03
http://blog.nationmultimedia.com/tawan3

I am still looking at negative tax. Your website is very good by the way. External factors still forcasting 10 year commodities increases some not with supply and demand but speculation on the futures market as well.
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