May 28, 2007 (LBO) – A controversy has erupted over a graph published in Lanka Business Online, which shows a co-relation between inflation and central bank credit, or money printed by the Central Bank to finance the budget deficit. . The first shots were fired at an economic policy debate organized by the Chartered Institute of Management Accountants (CIMA), when economist Harsha de Silva, a fierce critic of Central Bank money printing, drew attention to it.
Babes and Sucklings
“Inflation forecasting in this country is very easy. You don’t need a Ph.D or anything to do that,” de Silva said.
“You look at central bank net credit to government. When it goes up, inflation goes up. When it goes down inflation goes down. It’s very child-like.”
Central Bank’s Assistant Governor H N Thenuwara said the relationship was ‘spurious’.
Governor Nivard Cabraal joined the fray last week saying statistics needed to be interpreted carefully, soon after saying that the Phillips Curve, which purported to show a relationship between inflation and employment, was later shown to be unrelated.
“I was told by Dr. Thenuwara a few days ago an interesting episode, where when Africa was being colonized, the number of churc