Prices, Savings and Interest Rate....

Probably, money demand and money supply are not directly responsible for changes in the price level or inflation, but the availability of goods and services in the economy which is determined by the demand and supply in the goods and services in the market, though the demand and supply of money decide the level of interest rate or borrowing cost in the economy, which has a significant effect on the demand and supply in the economy and the demand and supply of labour in the economy. But, the borrowing cost or the natural real interest and the wage cost or the natural real wage rate after full employment start falling due to the evidence of inflation put by the Phillips curve which could affect savings in the economy, nonetheless, the demand for money as put by Keynes has three functions - consumption, precautionary and speculative demand for money. But, here we are talking about just the speculative demand for money or the savings that go for investment and a rise in the general price level after full employment would affect the savings or supply of money which could further lower real interest rate and savings. We see that any deviation from the natural real rate would magnify itself, either inflation or deflation. In this situation higher borrowing cost would further increase inflation by restricting the supply of the economy. But, it is true that the price level could fall before the full employment because supply could be increased by lowering the borrowing cost and use the excess labour supply or international trade, after it higher nominal wage cost could increase due to tight labour market, labour would demand higher wages to relocate which itself would put a lid on labour demand and wage cost inflation. Higher wage cost would help increase population and demand, but only slowly which could help increase supply and growth in the long run. Higher wages are important at this stage because our population growth is going down and higher supply has depressed the prices globally. Higher inflation, higher wages and higher borrowing cost, at the same time, would make the economy uncompetitive and lose demand supply and growth; still lower borrowing cost would help contain the cost and prices. The evidence from Japan, the US and Europe has shown that prices are not increasing due to the falling population growth rate.

Though, not very clear why there is a difference between price level targeting and inflation targeting since both are the same, probably, inflation is the price level or general price level in the economy... Nonetheless, a higher price level or inflation target could help increase demand, because prices rise when demand increase or higher demand means higher prices, therefore if the Fed targets higher demand it may also increase the price level or inflation target. Similarly, if we have to target higher supply we must again target higher prices, but due to irrational expectations or exuberance the market supplies more which increases price corrections and prices may start falling. But, due to utility or profit making function people still would buy at lower prices which means lower prices increase demand and prices which increase demand and profits, but, again due to irrational expectations or exuberance people also often demand more than supply and prices overshoot... This has been taken from the stock market which is often prone to irrational exuberance and risks, the market skids due to, both domestic and external factors which is very common, even in this age of internet and information, long term investment in a good and cheap stock with higher price target are safe compared to others. Any economy or stock is not fully insulated from external shocks, too, when cheap dollar denominated money has boosted investment and asset prices, not even backed inflation in the emerging markets... Nonetheless, higher prices expectations not supported by demand and supply and fundamentals could force correction in the market or the economy.... Moreover, a 2% price target is too low to increase investment demand, for example the Fed has let only .02 dollar inflation in a dollar which is too low to increase investment employment supply and demand and prices and growth...