Monday, 28 July 2014

Stefan Karlsson thinks inflation targetting is problematic.

He should pay more attention to me and Positive Money.
Stefan trotts out the old argument that inflation targetting is problematic in that when interest rates are cut so as to cut unemployment, the interest rate cut can spark off asset price bubbles. As he puts it:
“This illustrates the problem with strict consumer price inflation targeting. When positive supply schocks pushes down prices, central banks are compelled to respond by pursuing monetary policy that creates unsound levels of debt and asset prices.”
Wrong. The problem is not with “inflation targeting”. The problem is with using interest rate adjustments to influence demand.
So the solution is . . . . don’t use interest rate adjustments to control demand. Instead simply create and spend more base money money, net of any changes to tax, when stimulus is needed, a policy advocated by Positive Money, the New Economics Foundation and Prof.Richard Werner.
Plus as I pointed out here, there is a long list of problems and defects in using interest rate adjustments to influence demand apart from the one mentioned above.

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