Thursday, May 17, 2012

Search for Austerity Continues as Central Banks Undermine Stimulus

Just to be clear, I’m not saying there aren’t good arguments for the BOE keeping a 2% inflation target.  I don’t agree with those who support this target, but it’s an intellectually respectable argument.  But only a complete lunatic would argue that the Cameron government should refuse to boost the inflation target above 2%, but then engage in fiscal stimulus which can only work by boosting inflation! That’s like shifting your car into neutral, than flooring the accelerator. They’d have to be complete masochists; “Let’s spend lots of money, run up a huge debt, and then watch the BOE sabotage our policy.”
Read it at TheMoneyIllusion
Austerity and Stimulus in northern Europe
By Scott Sumner

This comment is about the UK but it equally reflects current policy issues in the US, Japan and a whole host of other countries. My view is that central banks ability to affect inflation, and to a lesser extent growth, is heavily skewed in favor of slowing either measure. The government, however, can have a far larger impact on growth and inflation through use of budget deficits/surpluses. One of the primary lessons I’ve taken from MMT/MMR/Post-Keynesian thinking is that central banks should be thought of as part of central governments (for sovereign currency issuers). Unfortunately central banks and governments continue to work in opposition of one another. The economic costs of these policies is finally becoming clearer.

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