Article;
License to stagnate.
Comment;
Falling inflation is not just sufficient to cut
interest rates; it is true if deflation is a problem with low level of
employment, not just deflation, as happens after the demand shock… This will
reduce the price-level; people will consume more and will save more. When they
will save supply of loan-able funds will increase which will be a factor
responsible for lower interest rates and not just falling prices and
unemployment. Nevertheless, they may too add to the pressure... But full-employment
remains our bigger concern. The central bank, almost automatically, reduces the
interest rates after a fall in the level of employment, as it happens, and the
economy will gravitate to the equilibrium. But it would not happen if we have
reached zero lower bound (ZLB) and are fighting deflation as happened in the US
during the great recession. But why we fight deflation? It is good for real
wages, and, consumption and saving/investment, and could be the stabilizing
factor because it would stoke demand by increasing real wages. And, for this we
do not need downward rigidity but upward flexibility in terms of real wages
which i think is possible to achieve without any policy intervention. In this
sense the economy is self-correcting... In this scene if the central bank
reduces interest rates it will be a double gain in terms of demand. A reduction
in the interest rate will also increase investment demand, and increase
employment and income. Therefore we do not need to fight deflation…
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