7.8          ndian    onom
          By the early 1970s, two American economists,            Reflation can also be understood from
     Milton Friedman (Nobel Laureate, 1976) and              a different angle—when the economy is
     Edmund Phelps challenged the idea of the                crossing a cycle of recession (low inflation,
     Phillips Curve. According to them the trade-off         high unemployment, low demand, etc.) and
     between inflation and unemployment was only             government takes some economic policy decisions
     short-term, because once people came to expect          to revive the economy from recession, certain
     higher inflation they started demanding higher          goods see sudden and temporary increase in their
     wages and thus unemployment will rise back to           prices, such price rise is also known as reflation.
     its ‘natural rate’ (the unemployment rate that
     occurs at full employment when the economy              stAgflAtion
     is producing at potential output, it is usually         Stagflation is a situation in an economy when
     called the natural rate of unemployment).31 They        inflation and unemployment both are at higher
     advocated that there was no long-term trade-off         levels, contrary to conventional belief. Such
     between inflation and unemployment. In the              a situation first arose in the 1970s in the US
     long run, monetary policy can influence inflation.      economy (average unemployment rate above 6 per
     They suggested that if monetary policy tried            cent and the average rate of inflation above 7 per
     to hold unemployment below its natural rate,            cent)34 and in many Euro-American economies.
     inflation will be rising to higher level, which is also This took place as a result of oil price increases
     known as the non-accelerating inflation rate of         of 1973 and 1979 and anticipation of higher
     unemployment (NAIRU).32 The NAIRU is that               inflation. The stagflationary situation continued
     rate of unemployment which is consistent with a         till the early 1980s. Conventional thinking
     constant rate of inflation. It means at NAIRU, the      that a trade-off existed between inflation and
     upward and downward forces on price (inflation)         unemployment (i.e., Phillips Curve) was falsified
     and wage (unemployment) neutralise each other           and several economies switched over to alternative
     and there is no tendency of change in the rate          ways of economic policies, such as monetaristic
     of inflation. We may say that the NAIRU is the          and supply-side economics.
     lowest unemployment rate that an economy can                 When the economy is passing through
     sustain without any upward pressure on inflation        the cycle of stagnation (i.e., long period of low
     rate.                                                   aggregate demand in relation to its productive
                                                             capacity) and the government shuffles with the
     reflAtion                                               economic policy, a sudden and temporary price
     Reflation is a situation often deliberately brought     rise is seen in some of the goods—such inflation is
     by the government to reduce unemployment and            also known as stagflation. Stagflation is basically a
                                                             combination of high inflation and low growth.35
     increase demand by going for higher levels of
     economic growth.33 Governments go for higher
     public expenditures, tax cuts, interest rate cuts, etc.     InflatIon targetIng
     Fiscal deficit rises, extra money is generally printed  The announcement of an official target range for
     at higher level of growth, wages increase and there     inflation is known as inflation targeting. It is done
     is almost no improvement in unemployment.               by the Central Bank in an economy as a part of
       31.  Stiglitz and Walsh, Economics, p. 822.             34.   Stiglitz and Walsh, Economics, p. 478.
       32.  Samuelson and Nordhaus, Economics, pp. 680–87.     35.   C. Rangarajan, Indian Economy: Essays on Money
       33.  Collins Dictionary of Economics, p. 446.                 and Finance, (New DelhI; UBSPD, 1998), p. 58.