In a recent article by The Economist, central banks are seen to be moving from using just monetary policy to rejuvenate economies to "coupling monetary policy action with commitments designed to alter the public's expectation of interest rates, inflation and the economy". The new direction on policy would include "tolerating higher inflation, in pursuit of higher output", which is directly opposite of what a central bank normally works to do.
From what we learned in class, the Federal Reserve Bank works to maintain full employment and low inflation, but has recently realized that there is a "conflict between pursuing lower inflation and higher employment" and will now look to see which of the two is at a more unsatisfactory level and focus on that one. This would be a very different action plan for the Fed who staunchly believes in price stability. In this link by trading economies, you can look at the inflation rate of the United States over any period of time.
A few things to consider about this new view on inflation and unemployment is that some believe that it could give the US economy a Chinese level GDP growth by letting inflation be higher that nation can create jobs to eliminate its jobs deficit. However, allowing for higher inflation also hurts bond holders and those who have a fixed income because it would lower their purchasing power. The move by the Fed is now being replicated in Britain and Japan. What should be considered is the effects that allowing higher inflation in the long term would mean considering that higher inflation discourages investment, erodes savings, stimulates capital flight, and could even cause political unrest in extreme cases.
This is a very interesting post Kimberly that pertains to our discussions on Central Banks in class. The new policy aim of "tolerating higher inflation, in pursuit of higher output," would be an interesting strategy to try and I am encouraged by the idea. I would like to see a shift from Central Banks obsessing over price stability and instead embrace some inflation in order to combat the levels of unemployment.
ReplyDeleteThis post is very interesting, however I think it oversimplifies the issue. Lumping every central bank together and saying that they are all shifting focus seems rather unbelievable. As we learned in class, different countries have very different preferences. Germany stands firmly in opposition to high levels of inflation, for example. So which banks are the ones shifting priorities?
ReplyDeleteAn interesting post on a very important topic. But should the United States pursue a short term solution aimed at reducing unemployment at the cost of sustainable long term growth, especially considering the possible effects of these measures?
ReplyDeleteI think the issue is that inflation creates uncertainty and lower investment, which is why the central banks obsess over price stability. When inflation is high, firms are less certain investment will be profitable. When risk is high there will be more aversion to it. It makes sense for the banks to play it safe right now.
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