Article;
More on wages and monetary policy.
Comment;
The FED should definitely stop targeting inflation now and
should let deflation materialize... lower prices will improve the
competitiveness of US exports and lower prices domestically will also improve
real wages... good for savings and consumption too... Delevereging would be
less painful because of more resources due to increase in the value of wages
and income. Downward rigidity is not supported by the UK example.
Even the US
graphs show that average wages and incomes have come down from the pre-crisis levels...
. But are now rigid at low-levels . The
question is how much will you squeeze the economy... there are limits... The
recent recovery of the UK
economy has shown that lower wages help in reducing unemployment... because
labor-intensive technologies are cheap to invest... Deflation would help from
many sides... Higher inflation expectation would increase income-expectation
and deflation would make people expect less income because inflation is very
low... If we will target inflation people will expect higher incomes and lower
prices will make people accept lower wages... Both nominal wages and prices
should go down to clear both goods and labor market... the Fed should stop
targeting inflation... we need to improve real wages by lowering prices (Pigou-effect)...
It will also help the economy in liquidity-trap...
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