Abstract
This paper focuses on the future of economic policies with regard to inflation. The dominant approach to inflation over the past two decades or so has been inflation targeting. The global environment of the decade circa 1995 to 2005 with the ?China effect? pushing down prices of manufactured goods and with primary commodity prices being subdued was conducive to low inflation. It is argued that inflation targeting has not been a great success story and is unable to address inflation arising from global forces or from struggles over the distribution of income. It is argued that a more sophisticated analysis than that contained in the Phillips curve is required. Further, and from our analysis, counter inflation policies should include the achievement of an inflation barrier consistent with full employment without inflationary pressures. This can be addressed by ensuring that there is sufficient productive capacity to underpin full employment, where sufficient is to be interpreted in terms of quantity, quality and geographical distribution. Further, we argue that this should be complemented by some form of incomes policy, to enable inflation to be contained without resorting to demand deflation.
Highlights
The “inflation targeting” regime is intended to work through the threat of higher interest rates if inflation rises though we have argued above that is an empty threat in the sense that higher interest rates have little effect on inflation
Inflation targeting was closely allied with the notion of the Phillips curve
It permitted the adoption of a single policy instrument to address both inflation and the level of economic activity on the basis that a constant rate of inflation was only consistent with some form of natural rate of unemployment or output
Summary
Alongside claims of a “great moderation” and the dominance of the “new consensus in macroeconomics”, it was often claimed that inflation targeting was able to provide a nominal anchor for the economy (see, for example, Marvin Goodfriend and Robert King 1997; Richard Clarida, Jordi Galí, and Mark Gertler 1999; Goodfriend and Bennet McCallum 2006).. As Arestis (2009) argues, there is a serious problem with the long-run, real natural interest rate, assumed to be known by the central bank and important in the process of inflation-targeting monetary policy. Even if such a notion exists its value is not known with any certainty (and its value would likely vary over time). The latter include the global environment of stable or falling commodity prices and the downward pressures on industrial products exerted by the expansion of China and others into the global markets
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