In its macroeconomic review released on Monday ahead of the new monetary policy, the Reserve Bank of India (RBI) seems to have brought a new concept into the policy debate: confidence channels.
Economists traditionally believe that problems in one country or region ripple out into others through three main channels, in the real economy, financial markets and global trade. RBI has twice in its new economic report mentioned a fourth possibility: the confidence channel. We assume the central bank is saying that waves of panic emanating in the West wreaked havoc in our part of the world.
There are several other indications that suggest that the central bank is taking a closer look at psychological factors in the current crisis and beyond. There is a fair bit about expectations, risk and uncertainty peppered through the macroeconomic review.
All this reminds us of a new, path-breaking book by George A. Akerlof and Robert J. Shiller, titled Animal Spirits, on how human psychology drives the economy. Have they been reading it in RBI?