Inflation Control
Hyper inflation has plagued most of the world's developing countries over the past decades. Countries in the industrialised world, too, have at times duelled with dangerously high inflation rates in the post WWII era. With varying degrees of success, all have employed great efforts to bring their inflation rates within acceptable limits. Generally, a moderate rate of inflation has been the ultimate goal. More recently, however, a few countries have pursued policies that strive to eradicate inflation altogether through complete price stability. This has proven to be a contentious enterprise, which clearly indicates that there is still no universally accepted solution to the inflation problem. Indeed, there is not even an agreed consensus regarding the source of inflation itself. The monetarist perception that the root of inflation is solely the excessive creation of money remains. So too does the belief that inflation originates in the labour market. And amongst a variety of others, the opinion that inflation "serves the critical social purpose of resolving incompatible demands by different groups" is also strong. This last, and more widely accepted, case shows that the problem is hardly a technical one; but rather a polit
From all of the confusion, what is clear is that a little inflation, perhaps 1 to 3 percent, is a far more efficient policy choice than zero inflation. Such a moderate inflation target would allow real wages to decline where necessary without firms having to impose wage cuts or fire workers. Thus, "rather than misusing their energy pursuing zero inflation, governments should be exploring the other policy options now available. In today's low-inflation environment, central banks can afford to be less restrictive than they have learned to be over the past two decades and allow greater room for growth. Exchange rates can, if necessary, be nudged downward without automatically provoking the wage and price spirals they did in the past." Such examples are not necessarily a panacea for the damage caused by zero inflation experiments so far, but they are certainly less harmful. As argued by Pierre Fortin, public opinion is starting to reflect the reality that "promised 'large benefits' from zero inflation are actually a mirage and that the 'small' unemployment costs are actually huge." This opinion has been voiced particularly loudly by Japan and France. And unless the elusive benefits of zero inflation soon manifest themselves, it is only a matter of time before the rest of the 'no inflation' pack realises they are barking up the wrong tree. Only in recent years has this question even been feasible. Previously, if inflation was single digit, it was quite acceptable. "Now, however, the world is entering an era of low inflation that brings more ambitious targets within reach. According to the International Monetary Fund, average inflation in the industrial countries is running at only just over 2 percent a year, and although the rate is much higher in the developing countries, it is falling quickly." As shown in this study, the proliferation of low inflation monetary policies to pursue virtual price stability is at the root of this phenomenon. However, as shown in this paper, zero inflation objectives are not wise: Central banks and governments may be trying to kill something that is not capable of being made extinct. This is particularly true in the era of globalisation. "Fiercer global competition and freer world trade, low oil and commodity prices, the declining power of labour unions, the growing resistance of consumers to price increases, and the heavy penalties imposed by financial markets on undisciplined governments" are working to complicate monetary policies, and further make zero inflation impractical. Thus, even if 'zero' or low inflation is readily achievable, as it seems to be, it does so in the face of very powerful variables. The purpose of this paper is to probe at these issues in an attempt to cast some clarity on the debate. Appropriately, it begins with an analysis of the consequences of low inflation on the conduct of monetary policy. As is well known, these effects are controversial, and this paper in no way purports to end the deadlock. Bringing the relevant issues to the fore, however, is equal to carrying a well-stocked toolbox that contains many of the necessities for well-crafted opinions. Inflation, both high and low, clearly poses great problems on the macro and micro economy. In higher doses, inflation erodes people's savings, endangers economic growth and propagates social instability. So, it has been argued, "why not in these more disciplined times try to eradicate the disease altogether, just as the world has gotten rid of smallpox? Why not, some central bankers and economists are asking, aim for zero inflation - at least in the industrial countries?" It is well known, and generally accepted, that the downward slope of the Phillips curve arises basically because of the presence of money illusion and expected inflation deviating from actual inflation. Based on this knowledge, and its subsequent critiques, the prevailing inflation/monetary policy controversy centres
Some common words found in the essay are:
Policy Price, Monetary Policy, Bank Canada, Phillips Curve, Monetary Fund, Bank Canada's, , Canada Europe, Conclusions Inflation, Federal Reserve, zero inflation, monetary policy, price stability, low inflation, phillips curve, inflation rates, inflation rate, central banks, inflation unemployment, economic growth, trade-off inflation unemployment, virtual price stability, objective monetary policy, short-run phillips curve, low inflation rates,
Approximate Word count = 4314
Approximate Pages = 17 (250 words per page double spaced)
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