In any equation that requires a solution there have to be controlled and uncontrolled variables. Unless something is fixed there is just an equation.
So it is in economics. Inflation has been the targeted fixed variable for decades. Interest rates have been controlled, and used as a proxy for the exchange rate. Unemployment as a proxy for economic activity has been allowed to float free.
The question is, should that change? Has the time come to say that after the recession the thing that matters most is an unemployment target as a proxy for economic activity, with interest rates fixed and inflation being the variable allowed to float free?
I'm struggling to think of a reason why not. I hope Mark Carney shares my concern. I fear too many politicians will not.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Better inflation than deflation? – surely the big policy question of the moment now?
Definitely better inflation
I suspect that inflation is already rampant in the places the ‘gov’ dont bother to look. we all know that rent and Fuel prices have increased dramatically and every so oftem there is a shy comment about the price of food. This last irem is mostly noticed by those of us without sufficient resourxes. We all know that when the price goes up it rarely comes down again. Things like drought and flood affect our food prices,atleast the basics, very quickly. So expect even more expensive staples
and more unmentioned and unmeasured price rises.I relise this is not quite what is reffered to but it is one of the building blocks of disaster.
I am no economist, but the fact is that we have had rampant inflation for the last 30 years. It’s just never reflected in the basket of goods that successive governments have used to come up with a headline inflation rate.
The huge increases in the price of housing have had knock-on effects all over the economy, and my gut feeling is that that is the first thing to tackle, rather than RPI, CPI et al.
You only get extreme deflation after a period of inflation. So, if you fear deflationary contractions, then creating inflation is counter productive. Deflation which occurs as a result of productivity increases is not a problem. This is exactly what happened during the industrial revolution. And price falls in electronic goods is clearly no problem to that industry.
A policy of inflation only achieves political results if people are not expecting it. Once it becomes recognised it’s efficacy is lost and governments then run the danger of pursuing it more and more to achieve the same result.