Views of a Nepali Economist

Fundamentally, the right wants the Fed to obsess over inflation, when the truth is that we’d be better off if the Fed paid less attention to inflation and more attention to unemployment. Indeed, a bit more inflation would be a good thing, not a bad thing.

[...] no matter what the cause of any macroeconomic problem in a country in any corner of the world, the IMF’s most common solution is to ask countries to reduce inflation. The Fund has to realize that all diseases do not have the same cure. Macroeconomic conditions and problems in different countries are diverse and varied. For an organization that boasts of many eminent scholars, researchers and bureaucrats, the IMF’s repeated inflationary stance makes it look like a one-trick pony.

Reducing inflation does not solve all systemic macroeconomic problems. You need inflation to achieve economic growth. If inflation really hampered macroeconomic stability and economic growth to the extent that the IMF policymakers think, why are high inflation countries like India, China, and Bangladesh achieving almost double digit economic growth while low inflation countries in Europe along with Japan and the United States growing below 3 percent?

Now, the Fed has, by law, a dual mandate: It’s supposed to be concerned with full employment as well as price stability. And while we more or less have price stability by the Fed’s definition, we’re nowhere near full employment. So this says that the Fed is doing too little, not too much. Indeed, some Fed officials — notably Charles Evans, the president of the Chicago Fed — have tried to make exactly that case.

 To be sure, more aggressive Fed policies to fight unemployment might lead to inflation above that 2 percent target. But remember that dual mandate: If the Fed refuses to take even the slightest risk on the inflation front, despite a disastrous performance on the employment front, it’s violating its own charter. And, beyond that, would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.

[...] large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years [...] modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery.

Labels: IMF, inflation, krugman, paul

# posted by Mukesh Khanal @ 2:11 PM