![]() ![]() But if this had been a serious constraint on policy, Japan’s growth rate should have been lower than that of its Group of Seven (G7) peers. Japan indeed reached the zero lower bound on interest rates long before other economies. And the experiences of the “other major economies,” by which Powell obviously meant Japan, cast doubts on the validity of the narrative. It sounds plausible, but must be substantiated by facts. This is the crux of the argument deployed by central banks to justify aggressive monetary easing in response to declining inflation. We want to do what we can to prevent such a dynamic from happening here.” ![]() We have seen this adverse dynamic play out in other major economies around the world and have learned that once it sets in, it can be very difficult to overcome. In turn, we would have less scope to cut interest rates to boost employment during an economic downturn, diminishing our capacity to stabilize the economy through cutting interest rates. The conventional fear of deflation and interest rates falling to their lowest level possible (the so-called zero lower bound) was well articulated in a speech by Jay Powell, Federal Reserve chairman, at the August 2020 Jackson Hole conference: “f inflation expectations fall below our 2 percent objective, interest rates would decline in tandem. Just as when the queen posed her question to LSE professors, it is again time for deep soul-searching by academics and central bankers about the prevailing monetary policy framework and, more fundamentally, its supporting intellectual model. Central bankers, therefore, are not entirely blameless. But the impact of triggering events on inflation varies according to preexisting financial conditions, which are in turn shaped by monetary policy. ![]() These were considered outside the remit of monetary policy. The triggering events, notably trade and production disruption owing to the pandemic and the war in Ukraine, were supply-side events. Second, they confidently contended that inflation was transitory and failed to restrain it even as prices rose rapidly. First, before the recent inflation spike to levels not seen in 40 years, many central banks in advanced economies were overwhelmingly concerned about low inflation. This question is more compelling for two reasons. In 2008, Queen Elizabeth II famously asked professors at the London School of Economics (LSE) about the global financial crisis: “Why did no one see it coming?” If Charles III were following in the footsteps of his mother, he would surely ask a similar question today, but about high inflation. It’s time to rethink the foundation and framework of monetary policy ![]()
0 Comments
Leave a Reply. |