Tag Archives: Inflation

MODERN MONETARY THEORY. Australian inflation data defies mainstream macro predictions, again – Bill Mitchell.

Even though inflation has been benign now for some quarters, the market economists, banks, still think it is about to accelerate and the RBA will be hiking interest rates.

But the reality is quite the opposite.

One of the on-going myths that mainstream (New Keynesian) economists propagate is that monetary policy (adjusting of interest rates) is an effective way to manage the economic cycle. They claim that central banks can effectively manipulate total spending by adjusting the cost of borrowing to increase output and push up the inflation rate. The empirical experience does not accord with those assertions.

Central bankers around the world have been demonstrating how weak monetary policy is in trying to stimulate demand. They have been massively building up their balance sheets through QE to push their inflation rates up without much success.

Further, it has been claimed that a sustained period of low interest rates would be inflationary. Well, again the empirical evidence doesn’t support that claim. The evidence supports the Modern Monetary Theory (MMT) preference for fiscal policy over monetary policy.

. . . Professor Bill Mitchell

NZ Inflation now at dangerously low level. 

The deflation risk will weigh heavily on the Reserve Bank, which is required to target an inflation band of between 1 and 3 per cent, which it has been outside for two years.

The idea that falling prices are a bad thing for an economy can seem counter-intuitive. But the problem as economists see it – and as witnessed in Japan over the past 20 years – is that when people expect inflation to be consistently low or deflation takes hold this can create a recessionary spiral. Expectation things will become cheaper suppresses consumer spending and business investment. The two feed off each other as lower consumption forces businesses to contract and focus on costs. That can start to cost jobs.

A cheaper TV or overseas holiday doesn’t look so good if you’ve been laid off. NZ Herald