Why are Central Banks using Economic Growth Control Mechanisms to Control Inflation?

Discussion in 'Economics' started by morganist, Jun 11, 2018.

  1. Inflation is theft and a redistobution scheme
    elitenapper likes this.
  2. tommcginnis


    As an equation...

    According to Taylor's original version of the rule, the nominal interest rate should respond to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP:


    In this equation, [​IMG] is the target short-term nominal interest rate (e.g. the federal funds rate in the US, the Bank of England base rate in the UK), [​IMG] is the rate of inflation as measured by the GDP deflator, [​IMG] is the desired rate of inflation, [​IMG] is the assumed equilibrium real interest rate, [​IMG] is the logarithm of real GDP, and [​IMG] is the logarithm of potential output, as determined by a linear trend.

    In this equation, both [​IMG] and [​IMG] should be positive (as a rough rule of thumb, Taylor's 1993 paper proposed setting [​IMG]).[6] That is, the rule "recommends" a relatively high interest rate (a "tight" monetary policy) when inflation is above its target or when output is above its full-employment level, in order to reduce inflationary pressure. It recommends a relatively low interest rate ("easy" monetary policy) in the opposite situation, to stimulate output. Sometimes monetary policy goals may conflict, as in the case of stagflation, when inflation is above its target while output is below full employment. In such a situation, a Taylor rule specifies the relative weights given to reducing inflation versus increasing output.

    Entirely stolen from Wikipedia:
  3. dozu888


    conventional wisdom, used by gold/silver/bitcoin salesmen to push the so called 'safe' assets.

    a 2% inflation target is necessary safety margin to avoid the deflation black hole.

    inflation is theft only if you put cash under the mattress.
  4. zdreg


    tell that nonsense to the people of Venezuela who have hyperinflation and are starving.
  5. dozu888


    there is a difference between 2% and 200%
  6. zdreg


    actually it is 1600% but why quibble. if you believe that US government inflation figures reflect reality I will sell you the San francisco bridge real cheap.
  7. dozu888


    sure, people can debate price indexing to the end of time... and I am not really a fan of the CPI indexing.

    but, if you didn't put money under the mattress, and invest, especially in the SF area, the return will more than negating the inflation index.
  8. pipeguy


    Niceee... simple working stuff for Fed. that's why they are now calm with inflation above 2 percents. Can we expect further stock rally because of that?
  9. Regardless of the question of whether you should control inflation or not. The question raised is why do they use aggregate demand controls (another thing) to control inflation.

    Read the linked article. This may be a bigger issue than the question of controlling inflation in the first place. There are other mechanisms which can control inflation.
    #10     Jun 11, 2018