When both wage/salary and employment  increase then inflation also increase. Due to more products and export foreign reserve will increase. The country will develop economically.

"Policies to combat inflation, as we have seen in the case of Serbia, almost always lead to slower growth in output and a rise in unemployment in the short term. Therefore, we can say that controlling inflation is not a free good."

http://www.doiserbia.nb.rs/img/doi/1452-595X/2013/1452-595X1301001A.pdf

http://www.federalreserve.gov/faqs/money_12856.htm

http://erasmus-mundus.univ-paris1.fr/fichiers_etudiants/113_dissertation.pdf

In a system in which there are those who think that "money talks" or "money makes the world go around", the more you stack money, the more you have influence. Economic policies have long been "tailored" in such a way as to serve the rich in the first & foremost place. The poor is doomed to accept "charities" from "above"..In my opinion, the main feature for good economic policy is to distribute wealth in a just fair mechanism. When the poor gets poorer, as we observe, then the poor has carried the burden of the frequent economic "mess" & the game is played so that the poor accepts the declining state of self affairs.

Sylantyev,

If you believe in quantity theory of money, and exogeneity of money supply, then the best hope you have for the central bankers to control inflation is  for them to put the monetary system on auto-pilot, and let the supply of money grow at the rate of change in the real output. However, if you are a post-Keynesian economist, then the central bank has no control over inflation. This is so, because according to post-Keynesian, the rate of inflation is determined not by liquidity of the banking system, but by the difference between the growth in the wage rate and  the rise in labor productivity. If the money wage rate increases more than productivity of labor inflation is sure to ensue. Clearly, from this perspective, the central banks have absolutely no control over inflation, because they can neither control  wages nor labor productivity. 

Given the Post-Keynesian view, the central banks' control over the inflation has never changed: The control never existed.

I hope you find this helpful.

Abdol

Thank Abdol for very interesting point of view : The control never existed. But on this logic the inflation targeting not working…!? Today there exists many new-Keynesian models in central banks, which try to solve this managerial problem with inflation. The main tasks for many central banks formulated as inflation targeting with price stability. From your point of view the central bank have the main task, which never not solve...?! What you mean?

Sylantyev,

That is correct, the central banks have a task that they can never achieve. Simply observe the ever expanding prices every where since the advent of central banking. Like universe , the entropy of  prices are ever expanding.

I mean central banks have the power to increase the supply of money to meet the endogenously increased  demand for money, or they could simply not increase the supply of money to meet the additional money demand. In the first case, an inflation may occur depending on the size of rise in money demand and the required increase in liquidity to the banking system to meet the additional demand for money. Alternatively, if the central bank refuses to supply additional liquidity to the banking system so that the demand for money is satisfied, it will engineer a recession and unemployment will occur.

Poverty, inflation, and unemployment are increasing every year.

Dear Abdol Soofi,

Productivity is dependent on consumption, as supply is determined by demand. If consumption falls, productivity will decrease also. Inflation decrease productivity, because the purchasing power is diminished, and the effects are dire for the economy. The trick of replacing wage increases and job creation using low interest loans is done, finished. Either people accept to consume less, or companies agree to pay more, or growth is stopped indefinitely.

Dear Sylantyev Sergiy

As central banks interest rates are cut to 0 and money is printed on a digitally enhanced scale, i suspect Central banks run out of options. So, they may be more bloated, but less powerful in terms of what they can actually do to keep the economy stable. Monetary means of stabilizing the economy seem to be at the limits of sustainability.

The main tools available to the Fed are interest rates and the money supply. As you point out, interest rates are near zero and the money supply ballooned by $4 trillion since 2008. Therefore, the only tool left is "credibility." See some early work by Ferderer here:

http://ssrn.com/abstract=101308

I agree with  Dr. Nizar Matar and money brings money.

Dear Hashem,

I agree with you, but "money brings money" to WHOM? 

Any way, FED print dollars 24 hours a day! It seems that the dollar "speaks" and say that although this huge printing of money, I am risk free! So all the surplus of the word is invested in dollars! With these money USA still makes its policy. It seems that a big problem is what currency will be the international currency: Dollar or euro? It seems that Merkel is to small a leader for Europe!  

Dear Sylantyev, since I live in Greece I have lost my reputation to economic theories that govern the public financial affairs. US has the $ as a payment currency worldwide and this is enough.

Before 1979, in  Carnegie Mellon University and The American Enterprise Institute, Concentration was on unemployment letting measured rates of inflation reach double digits.

Allan H. Meltzer (2010) Politics and the Fed, Carnegie Mellon University and The American Enterprise Institute. www.carnegie-rochester.rochester.edu/april10-pdfs/Meltzer.doc

Hello Bradut,

First, what kind of productivity are you referring to? The productivity I was referring in my answer above, was productivity of labor or simply output/labor ratio. 

In any events, regardless of productivity one might have in mind (e.g. productivity of capital), consumption has absolutely nothing to do with it. The simplest model of consumption states that consumption depends on disposable national income. If one wants to make the  consumption function a bit more sophisticated one might include wealth as well as the interest rate in the model.

Heloo Abdol,

Micro and macro economics are connected. Consumption is the sum of demand met by supply. If consumption is diminished supply providers have to keep productivity high while dealing with diminishing output. This is achieved by increasing productivity. Increasing productivity while demand is diminished is achieved by reducing the number of employees and the wages of existing employees in order to obtain more output/employee. This micro process summed in all companies generates unemployment and income decrease thus generating decreased consumption, because of diminishing disposable income for a large population of consumers. Even if a small number of consumers have increased income, their consumption does not compensate the general consumption demise. This is the essential ground for crisis.

Consumption does depend on disposable national income, but, if a small number of people have hugely increased disposable income while the majority of consumers have diminished disposable income, even if the total disposable income or the average disposable income will be higher, the overall consumption will be lower. Decreasing interest rates will not do any good because it will only reach a small number of consumers, the ones already having a sizable disposable income, while the others will not benefit because of diminished credit ratings.

While the sum of consumption may seem keeping up, the structure and location is changed. If measures taken do not tackle unemployment, and compensate the loss of income, the next stage of the crisis kicks in. While income gap is increasing, and the number of consumers having a sizable income is diminishing, more and more businesses fail, reducing furthermore both supply and demand. Business failures also start to reduce the number of high income consumers, while managers and owners alike loose their income, and puts pressure on banks having to cope with bad credits in the first stage and loss of customers in the next stage.

This all process can be masked by capitals fleeing from businesses towards capital markets and pushing up the financial market, creating a false sense of recovery, while at ground level the economy is severely damaged.

I may be gloomy, as i feel rather pessimistic right now. It may affect my objectivity. I hope i am wrong. But CB's keep interest rates low for a reason, and it seems that it is not enough.

Let me refer to John T. Harvey's opinion. He sustains that "Fed officials were faced with problems they did not think could occur. The events of 2007-8 clashed violently with their theoretical model, which is why their earlier actions had done nothing to defuse the situation and their subsequent ones proved largely ineffective. Unless they adopt a different paradigm, there is no reason to believe that the proper lessons will be drawn from the crisis. A repeat remains a distinct possibility"

I am interesting in his view, but I am not completely convinced, because I think that Janet Yellen is managing monetary policy by stressing the importance to sustain employment in USA (at least - she is often repeating - until the 2016).

For that reason, I suppose, her monetary policy is supportig the capital inflows from developing countries (particularly BRICS) towards USA.

The real problem is IMHO: did Janet Yellen cause a currency war? 

https://www.researchgate.net/post/Did_Janet_Yellens_monetary_policy_cause_a_currency_war

Reference: http://www.economiaepolitica.it/primo-piano/understanding-us-monetary-policy-in-the-aftermath-of-the-financial-crisis/ 

The Federal Reserve Balances, since the days of 'unfettering' from the Gold standard have only grown because of the marginal efficiency of encouragement to invest decreasing with the volume of money thrown into the system, but it has proved to be resilient.

Now the Fed has to allow more encouragement for investment into the economy without increasing this balance sheet too much as the inflation target remains untouched showing weariness in the underlying economy.

However that will mean not standing up to further lowering yields on the longer end of the curve ( below 2% on the 10 yr bond) and waiting while holding up interest rates with the overnight repo system introduced to hold up the money market rates.

The Fed has done a fair job of allowing and encouraging free market forces to come in and aid a recovery and it remains moot to assume that public investments in infrastructure could have speeded up this recovery as well. The Fed has to similarly focus on remaining visible with a "judicious mix" of temptation and resolve while most of the added securities will expire on their own in a few years allowing Federal reserve balances to come down.

Trimbath,

The near zero interest rate indicates the low value of money because of too much money supply in relation to demand. For instance, most of the US importers from China demand renimbi than US dollar. The US dollar is still very strong due to its status of global reserve currency. Thus, the US dollar enjoys such prestigious position because no any other currency has acquired such a position.  

In my opinion, both the FED and the ECB have emerged strengthened from the episodes of the financial crisis that began in 2007-2008. The policies of liquidity, interest rates and QE have allowed a recovery of the economy. The question that remains is what will happen to the debt bubble that these policies have created and how normalization will be towards adequate levels of debt.