1/3 Most analysis of the implementation of #Demonetisation focus on the ability/inability of the banking system to rapidly provide alternative 'money' to the people as this is what affected the real economy. @Darkwyr@CafeEconomics
2/3 The banking sector, in fact, did a second and much more onerous job counting and passing on the two currencies that were demonetized back to the RBI. @Darkwyr@CafeEconomics
3/3 Given that almost the entire amount that was demonetized went back to RBI, I would call this a highly creditable implementation. It is another matter that the RBI took an inordinate amount of time to count it again. @Darkwyr@CafeEconomics
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The disruptions caused by Covid-19 and the lockdowns may make the work of macro policy more complicated than usual, simply by worsening the short-run tradeoff between growth and inflation.
Let me explain.
1/6
A major factor behind the growth-inflation tradeoff is that in any economy close to full capacity, there is excess capacity in some sectors, while others face capacity constraints.
2/6
Increasing aggregate demand in such a situation lead to more growth in the excess-capacity sectors but also more inflation in the sectors facing constraints.