High inflation is treated as a theoretical curiosity by many analysts - they are unwise to do so, writes Kenneth RogoffAt least he now gets the difference between currency issuers and currency users.
More fundamentally, where, exactly, does one draw the line between advanced economies and emerging markets? The eurozone, for example, is a blur. Imagine that there was no euro and that the southern countries had retained their own currencies – Italy with the lira, Spain with the peseta, Greece with the drachma, and so on. Would these countries today have an inflation profile more like the US and Germany or more like Brazil and Turkey?
Most likely, they would be somewhere in between. The European periphery would have benefited from the same institutional advances in central banking as everyone else; but there is no particular reason to suppose that its political structures would have evolved in a radically different way. The public in the southern countries embraced the euro precisely because the northern countries' commitment to price stability gave them a currency with enormous anti-inflation credibility.
As it turned out, the euro was not quite the free lunch that it seemed to be. The gain in inflation credibility was offset by weak debt credibility. If the European periphery countries had their own currencies, it is likely that debt problems would morph right back into elevated inflation.…
Recognising that inflation is only dormant renders foolish the oft-stated claim that any country with a flexible exchange rate has nothing to fear from high debt, as long as debt is issued in its own currency. Imagine again that Italy had its own currency instead of the euro. Certainly, the country would have much less to fear from an overnight run on debt. Nevertheless, given the huge governance problems that Italy still faces, there is every chance that its inflation rate would look more like Brazil's or Turkey's, with any debt problems spilling over faster price growth.At least we are now playing in the same ballpark. And he admits that the issue is chiefly political rather than economic. That's progress, I'd say.
Modern central banking has worked wonders to bring down inflation. Ultimately, however, a central bank's anti-inflation policies can work only within the context of a macroeconomic and political framework that is consistent with price stability. Inflation may be dormant, but it is certainly not dead.
The Guardian
The Exaggerated Death of Inflation
Kenneth Rogoff | Professor of Economics and Public Policy at Harvard University and former IMF chief economist
Kenneth Rogoff | Professor of Economics and Public Policy at Harvard University and former IMF chief economist
2 comments:
I agree with regard to there being progress, in that Rogoff says:
a country's long-term inflation rate is still the outcome of political choices not technocratic decisions and No matter how much central banks may wish to present the level of inflation as a mere technocratic decision, it is ultimately a social choice.
Although his fundamental point is that central banks can't control inflation (see above), he repeatedly talks about the tremendous progress and powerful tools that central banks now possess, having forsworn the Keynesian foolishness of the 1970s and before. Does anyone know what he is talking about more specifically?
Here are some examples:
massive institutional improvements concerning central banks have created formidable barriers to high inflation
back then, monetary authorities were working with old-fashioned Keynesian macroeconomic models, which encouraged the delusion that monetary policy could indefinitely boost the economy with low inflation and low interest rates. Central bankers today are no longer so naive, and the public is better informed.
Modern central banking has worked wonders to bring down inflation.
To me, what changed is not central bank policies, but rather technological and political changes accelerating the pace of globalization. It seems to me that Rogoff has got this backwards, as he says:
increasing globalisation and technological advances made it much easier for central banks to deliver both solid growth and low inflation
He seems to live in a world of economists who all agree that central banks are tremendously powerful and enlightened, so he ends up with this tortured and incoherent piece on how central banks don't really have all that much power...
Short answer. Like Krugman, he is a monetarist (obsessed with inflation, interest rates, central banks, blah blah).
And he doesn't understand Keynes on effective demand and how to address it fiscally.
The "Keynesianism that failed" was bastard Keynesianism.
a country's long-term inflation rate is still the outcome of political choices not technocratic decisions and No matter how much central banks may wish to present the level of inflation as a mere technocratic decision, it is ultimately a social choice.
Fiscal policy that is not sufficiently austere ("responsible," "disciplined") leads to inflation in the long run owing to the IGBC. The job of central banks in this view is to offset fiscal policy with monetary policy, so the fiscal and monetary authorities are in an inverse (adverse) relationship. But central banks cannot fine tune inflation either and the bias is against interest rates that constrain growth.
massive institutional improvements concerning central banks have created formidable barriers to high inflation
back then, monetary authorities were working with old-fashioned Keynesian macroeconomic models, which encouraged the delusion that monetary policy could indefinitely boost the economy with low inflation and low interest rates. Central bankers today are no longer so naive, and the public is better informed.
DSGE modeling, Taylor rules, etc.
Modern central banking has worked wonders to bring down inflation.
The Great Moderation that ended in the GFC.
increasing globalisation and technological advances made it much easier for central banks to deliver both solid growth and low inflation
Global fungibility of labor and increased productivity reducing the need for workers. increasing capital share (corporate profits) without wage pressure.
He is arguing against the view that public debt is not a problem in the long run owing to the IGBC as long as the cb can set interest rates on new debt under the growth rate.
What he is saying is that cb are not omnipotent in offsetting undisciplined fiscal policy that is inflationary in the long run.
He is a debt and deficit scold.
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