SIMPLY PUT. How ‘hawks’ and ‘doves’ impact your EMI

Two school friends bumped into each other after decades and decided to drop their plans and spend time in a coffee shop. As they sipped their coffee one of their favourite MLTR songs started playing. Anu’s ears perked up to the lyrics ‘a thousand sunsets…it’s a freedom of thousand doves.’

Anu: In school we knew doves mean birds. Nowadays I hear central bankers being called doves. Why it is so?

Ram: Referring to a central banker as a dove means he or she is inclined towards easy monetary policy like keeping interest rates low and increasing supply of money in the economy by means such as quantitative easing to stimulate demand and in turn growth.

Anu: Oh okay, but isn’t that the mandate of all central bankers?

Ram: Mostly yes, but they also have a responsibility to ensure inflation does not spiral out of control.

Anu: Why should inflation spiral if easy monetary policy is followed?

Ram: Prices are determined by the intersection of demand and supply. So, if demand is higher than supply (more money chasing fewer goods), then they intersect at a higher price and vice versa. Easy monetary policy makes it cheaper to borrow money and buy and hence increases demand. This helps stimulate the economy.

Anu: If supply does not keep pace, will inflation rise?

Ram: Yes. Central bankers who are reluctant to trade higher growth for the potential inflation risk from excessive easy monetary policy are called hawks. There is a trade-off to be made. Some level of inflation is good as people will postpone demand if they think prices will fall instead of increasing. If too many people postpone demand, it will result in economic activity slowing down. Hawks worry that easy monetary policy over long periods can result in demand far exceeding supply causing inflation to spiral.

Anu: Oh! Are they central bankers or birds?

Ram: Haha! Its just like bulls and bears in the stock markets. There are always differing views even amongst top economists.

Anu: Okay, but I have always heard about doves. Where have all the hawks gone?

Ram: More than a decade of low inflation and low growth in developed economies have sidelined the hawks. But you might find it interesting to learn that Raghuram Rajan, our former central banker was considered an inflation hawk. Some also credit his policies for subsequent low inflation periods in India post his tenure. He of course disregarded both terms and said the central bank was a vigilant owl!

Anu: Alright. Wonder how the birds would react when they hear this!

COMMENT NOW