The latest pronouncements by Olivier Blanchard of the International Monetary Fund are concerning as it seems he thinks we should jettison decades of economic thinking and embrace higher inflation and activist fiscal policy in conjunction with greater regulation.
The news reporting of the Blanchard paper suggest that the IMF has called
for the overthrow of inflation targeting
yes the paper has the following disclaimer
Disclaimer: The views expressed herein are those of the authors and should not beattributed to the IMF, its Executive Board, or its management.
So let’s not yet assert that the IMF has embraced these views.
And if Blanchard thinks 4 per cent inflation is ok, why not 5 or 6 per cent? It is a slippery slope.
We really should call this exactly what it is – crude inflationism. That is all Keynesianism ever was, is and shall be forever more.
Skuter
15 Feb 10 at 8:28 am
err no Keynes correctly identified Deflation as much worse for society than inflation and much harder to combat.
He was right.
Skuter obviously never read The Economic Consequences of the Peace,
Actually if Samuel had actual read Blanchard’spaper he would find Blanchard arguing for higher inflation targets to enable monetary policy to work!
Butterfield, Bloomfield & Bishop
15 Feb 10 at 9:17 am
Blanchard’s argument seems to be that if inflation had been higher at the start of the GFC, if would have been easier to effect reductions in real (as opposed to just nominal) interest rates than it was in light of low inflation. A bit ironic given that an implication of Blanchard’s approach would have been even lower interest rates through the early to mid 2000s – precisely the factor that many commentators have blamed for the US ‘housing bubble’ that led to the crisis.
Sleetmute
15 Feb 10 at 10:51 am
So what -2% real interest rates are too high?
Semi Regular Libertarian
15 Feb 10 at 4:07 pm
Yeah SRL, Homer’s Keynesianism shades over into Major Douglas’ Social Credit
jtfsoon
15 Feb 10 at 4:08 pm
well Statman’s Keyneisioanism has no liquidirty trap.
Shame that.
That was the reason to use fiscal policy.
Butterfield, Bloomfield & Bishop
15 Feb 10 at 4:13 pm
So BB&B,
If America was in a liquidity trap, how are higher inflation targets relevant?
Why do they need higher targets to “work” when the lower end of inflation targeting has been achievable and stable?
Semi Regular Libertarian
15 Feb 10 at 4:51 pm
I read the news reports with some amazement and wondered what might have prompted Blanchard/the IMF to come out with that stuff.
My guess is he sees inflation as the only escape route for all those deficit plagued countries. He’s either opposed to, or sees no chance of, a serious reduction in government expenditure or increased taxes. I imagine he would have got the nod from a central banker or two to let the hare loose and see how it goes.
DavidLeyonhjelm
15 Feb 10 at 5:31 pm
Yes, inflation is the escape route. But strange to see it coming from someone at IMF.
Perhaps people have forgotten how corrosive inflation was. How it distorted business decisions and encouraged businesses to do dumb things.
There was a grocery wholesaler who as very upset when inflation in Australia was driven down. He had made a lot of money with “investment buys” – he would buy a large quantity of product on promotion (I knew of at least one case where he bought a trainload) and then sell it over time at the full price. Chances were that, aside from the promotion, there were a few price increases over that period too.
Tho interest rates were high, he was a slow payer so much of the stock was financed by his suppliers.
One day I will explain how much of this was the consequence of the Whitlam government’s Prices Justification Tribunal.
And probably if inflation does roar back some government will attempt price control again.
ken n
15 Feb 10 at 6:11 pm
And probably if inflation does roar back some government will attempt price control again.
Rudd is. He’s already taking swings at the banks for raising rates beyond what he thinks they should go.
JC
15 Feb 10 at 6:13 pm