[PDF Notes] The Policy of price stabilisation has been criticised on the following grounds

The Policy of price stabilisation has been criticised on the following grounds:

(i) The concept of price stability is vague because it is difficult to determine the price level which is to be stabilised.

(ii) The concept of price stability also does not make it clear which prices are to be stabilised-wholesale prices or retail prices, consumer goods prices or producer goods prices.

(iii) Price changes are the symptoms, and not the cause of business fluctuations. Price stability deals only with symptoms and not the disease; it may not bring stability in business activity.

(iv) Variations in prices are necessary for rhe successful working of the price mechanism in a capitalist economy and price mechanism plays an important role in the optimum allocation of resources in the economy. The policy of price stabilisation renders the price mechanism unnecessary and ineffective.

(v) Price stability reduces production and retards economic progress. Stabilised prices leave no incentive for the businessmen to increase production because there will be no increase in profit margin. They will also not be interested in making new investments.

(vi) In a country marked by widespread unemployment, price stability is not a desirable objective. Some increases in the price level are necessary to encourage the business community to increase production and employment.

(vii) The monetary policy aiming at price stability proves inequitable and redistributes income and wealth against fixed income groups, particularly during the periods of declining costs.

(viii) Price stability is not a feasible objective of monetary policy. The central bank cannot effectively control the volume of credit in the economy because of the existence of a number of non-bank financial intermediaries whose activities are outside the control of the central bank.

Moreover, monetary policy is better suited to control an inflationary rise in prices, but may fail to check the falling prices during a deflationary period.

Leave a Reply

Your email address will not be published. Required fields are marked *