As a 65 year old winner of the Nobel Prize in Economics, Joseph Stiglitz is not someone that mainstream economists can dismiss as either a crank or senile–the usual reactions to anyone who opposes conventional thought in economic theory or policy.
So when he comes out and says that inflation targetting is foolish and dangerous, his views are worth taking note of. Here is Stiglitz’s commentary on inflation targetting, published earlier this month.
June 10th, 2008 at 3:24 am
Hello Steve
This inflation targeting is another example of economists and therefore governments trying to control a complex system with a simplistic action. They simply change a parameter with no understanding of the dynamics of the system particularly the feedback loops involved and the time delays involved. Here are some comments by an Engineer.
To think that by “targeting” one parameter the whole system will respond in a beneficial way, is in my opinion egregious. I have seen this approach taken by technicians to solve problems in electronic control systems but in this area time delays are small and the folly reveals itself quickly. In this case the Technicians start talking about “Black Art” and the Engineers are called in.
It is interesting to note that the RBA approach of increasing interest rates will, in the short term, work because of the our CAD. This by keeping the exchange rate high and the cost of imports low.
If however it reduces our ability to service, and take on more foreign debt the value of the currency will fall resulting in a very nasty positive feedback loop where the drop makes the debt servicing problem even worse, resulting in runaway inflation followed by even worse consequences.
The scenario for a country with a Current Account Surplus would be the opposite in both respects.
Someone needs to be looking at the whole picture including the system dynamics. And yes I agree that this targeting should be dropped.
BrightSpark
June 12th, 2008 at 8:41 pm
“They simply change a parameter with no understanding of the dynamics of the system particularly the feedback loops involved and the time delays involved”
I wouldn’t just dismiss the RBA as idiots – I dare say they’re more aware than most of us about the dynamics of the system.
I do agree that inflation targeting is questionable, especially when CPI is being affected so much by forces external to Australia; but I don’t doubt for a moment the economists in the RBA are also aware of this.
The simple fact that that the RBA didn’t raise interest rates at their last meet (despite growing inflation) says they are well aware that CPI isn’t the only important factor in determining the economic outlook.
June 18th, 2008 at 8:40 pm
Undoubtedly, Stiglitz is someone to listen to. He may not be a crank, or senile but that does not necessarily mean he is right all the time.
It is a shame that someone with his great intelligence, and experience cannot come up with something as revolutionary as Transfinancial Economics. What is relevant here (in connection with the article concerned)is the concept of super-flexible electronic controls over inflation in which targetting is not necessary as understood in mainstream economics.
My project on Transfinancial Economics is continuing, and there is new info on controlling inflation levels notably the notion of Price Decrease Subsidization which may hold the key to the whole problem. See the p2p foundation entry…
June 18th, 2008 at 9:30 pm
I think the main problem with this is that it is not a precise tool of economic management and therefore limited. That is being able to differentiate between ‘monetary’ effects and underlying changes in input costs. The underlying cost curve has changed because the cost inputs related to labour and materials have fundamentally changed. Consequently targeting inflation as purely a monetary phenomenon will result in a negative ‘multiplier’ effect in terms of over slowing economic activity as rates are increased. Bit like driving a car without being able to access and manage all the controls.
May 28th, 2010 at 4:29 pm
Adjusting one parameter in a complex system would cause short term change but cause system would settle again within it’s new parameters, would it not?
Sure inflation targeting is a blunt instrument but what other option do they have.