Developing economies are also more exposed to financial shocks. Sooner or later, monetary policy in advanced economies will normalize and, if past experience is any guide, many emerging markets and poor countries will experience massive capital outflows. The specter of capital flight may be particularly salient for poorer economies, particularly if accompanied by a reduction in development aid. Such sudden stops bring their own policy dilemmas, not least downward pressure on exchange rates.
Policymakers can either let their currencies depreciate, which would fuel inflation, or hike interest rates, which would adversely affect growth and debt sustainability. Already have an account? Log in. For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world's foremost leaders and thinkers on the issues, events, and forces shaping their lives.
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Company Corporate Trends. Defence National International Industry. International UAE. Saudi Arabia. US Elections This was about politics, not economics. The combination of growing assets and preferential credit allocation means the Fed is picking winners and losers. The discipline of the market is being replaced by the whims of bureaucrats. This is the real danger to our economic well-being.
We need serious Fed reform to ensure the central bank remains an agent of economic stability rather than political patronage. Because members of Congress are generalists and central bankers are specialists, the former often lack the expertise to monitor and police the latter. Economists widely agree that with monetary policy, rules work better than discretion. The economy is far too complex for the Fed to micromanage. Zero inflation makes the economy inflexible and vulnerable to crises for reasons stated below.
Deflation risk [2]. Close to zero inflation increases the risk of deflation, which is just as negative economic event as high inflation is. Consumers may think that negative inflation figures are desirable. However, the supposed benefits of deflation are misleading. Sustained deflation makes households and businesses expect that tomorrow prices will be lower than today. As a result,. Why buy today if prices will be lower tomorrow?
All these factors drive domestic demand and economic growth down. Why does zero inflation entail the risk of "hidden" deflation? This is largely due to the difficulties in measuring inflation accurately. There is a lot of evidence that inflation figures provided by statistical agencies tend to overestimate changes in the real cost of living. Errors can be attributed to the better quality of some goods in consumer basket. Such goods are more expensive, and are sold at a higher price, reflecting an improvement in the quality of life rather than general price increases.
Also, setting the inflation target at zero level or close to zero makes it easy to overlook deflation, together with its repercussions. Stickiness of prices and high economic vulnerability. Zero inflation makes it difficult for the economy to adjust to changes. Let us imagine an event in which demand for goods and services falls sharply.
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