SYDNEY and KUALA LUMPUR, September 20 (IPS) – Policymakers have been obsessed with achieving low inflation. Many central banks apply the inflation targeting (IT) monetary policy (MP) framework in a variety of ways. Some are tasked with keeping inflation at 2% over the medium term. Many believe this ensures sustainable long-term prosperity.
The heads of major central banks – such as the US Federal Reserve Bank (Fed), Bank of England (BoE) and Germany’s Bundesbank – pledged to keep inflation at 2% soon after. NZ. Although usually ‘mid-term’, the high cost of IT is described as necessary, but briefly. Worse yet, the promised growth benefits have not materialized.
The Terms of Agreement The International Monetary Fund (IMF) never endorsed any fixed inflation target. Article IV states that, “each member shall: (i) endeavor to direct its economic and financial policies with the objective of promoting orderly economic growth with reasonable price stability, subject to according to their circumstances”.
This clarity is highly dependent on conditions and circumstances. The logical priority would then be to maintain prosperity with “reasonable price stability”, and not to commit to an arbitrary universal information technology at any cost. However, many IMF officials push for the 2% target.
For him, “Monetary policy needs to look beyond its core focus on low and stable inflation” to promote balanced and equitable growth, while minimizing adverse spillovers to developing economies.
One IMF chief economist even asserted low inflation and economic progress as a “divine coincidenceand emphasizing 2% inflation target is too low. After the GFC, one IMF Working Papers argues for a long-term inflation target of 4% for advanced countries.
Bank of Canada Working Document conclusion“The current state of economic research – both empirical and theoretical – provides little basis for believing in the important observable benefits of low inflation such as increased real GDP growth.” .
Benefits of IT?
Any unbiased consideration of the actual IT experience can lead to it being rejected long ago. IT is clearly crucial to growth and equity, not to mention the Sustainable Development Goals (SDGs). The four central bank (CB) experiences offer valuable lessons about the possible consequences of IT.
The US Fed is, by far, the most important CB globally, while the BoE is historically important. The Bundesbank was the most inflation-averse bank in the post-war era, while RBNZ was the world’s leading information technology bank.
Inflation in NZ in the period 1961-90 averaged 9%, more than 5.1% in the US and 8% in the UK. However, the mighty Fed and the venerable BoE managed to imitate the tiny RBNZ! Germany’s famous inflation obsession is attributed to ‘hyperinflation’ between the wars and its bloody aftermath. Inflation there averaged 3.4% between 1960-90, that is, even before IT.
No country has achieved sustained economic prosperity despite achieving an inflation target of 2% or less. GDP growth per capita fell sharply in the US, UK and Germany, while it increased marginally in NZ (Table 1).
Slower growth in the long run leads to lower investments (you 2). IT advocates argue that high inflation causes uncertainty, which in turn reduces investments, but lower inflation has clearly made it worse.
As rates of investment in IT decline, productivity growth in the UK, Germany and NZ (table number 3). While productivity growth increased marginally for IT in the US, it trended downward in all four economies (Figure 1-4). US hourly output grew only 1.4% after 2004,”half its speed in the three decades after World War II“.
Most advanced economies have experienced a decline in productivity since the 1970s. With the European Central Bank’s strict IT framework, the eurozone has also seen productivity growth slowed markedly during the period 1999-2019.
The decline in productivity growth often becomes the reason for falling real wages and working conditions, forcing workers to work harder to make up for lost earnings. Productivity and growth slowdown are seen as “secular stagnation“.
All of this has been blamed on inflation. However, the reduction in inflation has not been able to reverse this trend, which has actually accelerated since the introduction of the GFC. Many explanations have been offered, but the reason for this failure is still controversial.
IT, low inflation, tax cuts and market reforms are expected to improve economic activity. Investment and economic growth are weaker, due to accommodative macroeconomic policies, slow down US productivity growth.
Similar, The Economist observed, “The falling demand has constrained the incentives for investment and innovation”. It attributes the decline in UK productivity growth to cuts in innovation investment due to “austerity” and “severe credit crunch”.
Concluding “without a doubt… the costs… are huge”, it is estimated that “UK GDP per capita in 2019 will be £6,700 ($8,380) higher than expected” if energy growth is to be expected. yield did not decrease further after GFC.
Developing recognize that’s widespread”unconditional“CB’s commitment to a 2% inflation target – given the current rising inflationary landscape – is likely to exacerbate the downturn. This could cause a dual debt crisis in many developing countries.
Pragmatism, not dogmatism
Central bankers should not be dogmatic. Instead, pragmatic approaches are needed to tackle the current state of rising inflation. This is especially necessary when worldwide inflation is primarily caused by supply shocks.
Western policymakers must consider the adverse spillover effects on developing countries, which are already on the verge of a debt crisis due to the prolonged slowdown. Government debt – with higher commercial borrowing costs – has increased since GFC, the West’s ‘quantitative easing’ and Covid-19.
But such claims clearly have no theoretical or empirical basis. It is therefore more harmful to recklessly enforce the 2% target by falsely claiming inaction.
IPS UN Office
© Inter Press Service (2022) – All rights reservedOrigin: Inter Press Service