Has the current monetary policy of central banking brought inflation growth to a halt and/or is it effectively limiting inflation growth?
The following analysis of the situation applies to the country in which I operate: Despite the National Bank of Poland's November forecasts suggesting an increase in inflation at the beginning of next year, 2023, the Monetary Policy Council has once again, for the third consecutive time (counting October 2022), kept NBP interest rates unchanged. Despite the constitutional provision on the independence of central banking, the NBP's monetary policy is significantly politicized. How politicized it is was evident during the NBP's involvement in the procedure of launching and applying on the largest historical scale since the 1st wave of the SARS-CoV-2 coronavirus pandemic (Covid-19) the monetarist concept of using domestic money as an anti-crisis instrument, thanks to which it was possible to quickly pull the economy out of the recession of the 2020 economy in 2021 (caused mainly by the introduced lockdowns and national quarantines) and thus generate an increase in inflation (mainly core inflation), which began to rise almost from the beginning of 2021, i.e. a year before the outbreak of war in Ukraine. According to the opinion of most economists and financial analysts, the NBP started raising interest rates too late in 2021. Because of this delay and the unreliable information policy regarding the forecasting of monetary policy, many borrowers are currently paying more than double the mortgage and business loan installments. Already, commercial banks are reporting a rapid deterioration in the quality of their loan portfolios due to the increasing number of loans that are not being repaid on time. As the central bank in Poland, i.e. the National Bank of Poland, in the period from October 2021 to September 2022, raising interest rates, significantly tightened monetary policy, so bank loans in the offers of commercial banks have become much more difficult to afford. With the economic downturn forecast for the next quarters, banks are further restricting access to credit by tightening lending policies. The result is a rapidly developing downturn in an increasing number of industries and sectors of the economy. More and more companies and businesses are freezing employee salary increases, announcing job cuts or already implementing them. Apparently, then, the belated and staggered strategy of raising interest rates is not causing a brake on inflation, but is causing more of a deepening of the downturn then the obvious question is to stop raising interest rates. Besides, what's the point of tightening monetary policy if it doesn't work, as the government continues to "sprinkle cash as if from a helicopter" (a reference to Milton Friedman's Helicopter Money) under a still soft fiscal policy and, in addition, conducted under the formula of adding money wherever and however much it can with an eye to political issues and future parliamentary elections (autumn 2023) instead of conducting "spotty" measures according to a social welfare strategy only for people and economic entities that really need this assistance to avoid bankruptcy. After all, the worsening financial problems of many SME businesses are not due to misguided business management decisions only to misguided, haphazard, ad hoc economic policy, including fiscal policy by the government (and monetary policy as well) and due to rising inflation, rising prices of fossil fuels, energy prices, raw materials, prefabricated goods, etc. The worsening energy crisis is also an offshoot of the government's indolence, ignorance, negligence, etc. over the 7 years (but also before that) of the necessary green transformation of the economy, including the development of renewable energy sources, nuclear power, etc., that is necessary to carry out. And the cost of these mistakes made in unreliable energy, climate, environmental policies will increase in the years to come due to CO2 emission fees. And who will pay these rising costs of the mistakes made in chaotic economic policies? As usual, these costs are passed on to the public.
In view of the above, I address the following questions to the esteemed community of scientists and researchers:
Has the current monetary policy of the central banking caused a halt in the growth of inflation and/or effectively limits the growth of inflation?
Has the central bank effectively anti-inflationary and/or anti-crisis monetary policy?
What is your opinion on this topic?
Please answer,
I invite everyone to join the discussion,
Thank you very much,
Warm regards,
Dariusz Prokopowicz
Central banks use currently contractionary monetary policy to reduce inflation; the three main contractionary monetary tools are: increasing interest rates, increasing banks' reserve requirement, and selling government securities.
The overall effect of this central banking philosophy seems to have country-specific outcomes (US/8.5%; EU/11.5%; PL/17.9%; H/22.5%; Russia/12.7%; Ukraine/24.6%; China/2.1%; India/6.8%).
Principally, the economic downturn in China is keeping its inflation low and also helping to limit global inflation. China is largely self-sufficient in food, but it is alert to imported inflation due to surging global prices for energy and raw materials. It will be interesting to see whether or not inflation will have tangible effects on China’s domestic development over the coming years. Because of its unique export-dependent economic system, China's money supply policies vary from methods used by other nations. Two ways China manages its money supply is by controlling forex rates and printing currency. The PBOC can also control the money supply by changing the reserve ratio and the discount rate.
Dariusz Prokopowicz Many countries around the world have been experiencing similar problems. Inflation has arrived after more than a decade of low inflation and low interest rates.
During this same period the government has been spending more and more on healthcare, pandemic response and trying to ease deprivation.
There is an imbalance between what the government would like to spend and what it can raise in taxation.
The past response to inflation has been to raise interest rates. This has the direct effect on mortgage rates and people cut back on spending causing a recession.
Eventually the recession will act as a brake on inflation but this takes time and is very painful for the economy. Also small businesses that are heavily geared will be forced to raise prices which makes inflation worse.
There is an argument in favour of holding interest rates low and let prices find a new level after a period of inflation.
Then of course we have to factor in the stability of the currency if the government chooses to borrow excessively to fund desirable current spending.
There is an argument in favour of evolving the global economic system to meet the needs of a modern national economy:
Preprint Global Economic System (March 2022)
Richard
The advantage of inflation is that it repudiates debt for those who have overspent. But this is a severe problem for the producers who have become creditors. So, the effect (good or bad) on a society are very long term - much longer than the current measures are providing. Printing fiat money has initial good effects for the non-producers. But the bill must be paid, but may take years of punishing the producers before the crisis comes. The stagflation of the Keynesian economics pre-Reagan took 2 decades to develop. We have to wait a bit longer for the crisis to fully develop.
Yes, John Hodge it will take more than a decade in this advanced contemporary era to overcome the crises. Because stagflation impacts and takes pace and motion to role on the wheels on the economic track.
The toughest is this stage of, uplifting the cart of stagflation on to the track, then to Push it on for pace before speed.
Regards
Fatema Miah in
If we accept that inflation is an increase in the money supply, and not a rise in prices, all implied assertions can be easily explained. It is not the symptoms of a disease, but rather the disease itself that causes the physical damage ! Likewise, it is not a general rise in prices but increases in the money supply that inflict the physical damage on wealth generators.
Increases in the money supply set in motion an exchange of nothing for something ! They divert real funding away from wealth generators toward the holders of the newly created money.
This is what sets in motion the misallocation of resources.
Moreover, the beneficiaries of the newly created money--i.e., money "out of thin air"--are always the first recipients of money, for they can divert a greater portion of wealth to themselves.
Consequently, mainstream economics doesn't tell us how all these bad effects are caused; it is part of the inflationary game.
———-—
The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy. Inflation is essentially antidemocratic.
Continued inflation inevitably leads to catastrophe.
Ludwig Von Mises (1990). “Economic freedom and interventionism: an anthology of articles and essays”
Stephen I. Ternyik
I like Milton Friedman. So, inflation is the increase in money supply above that of wealth (asset) creation. I think democracies fall into the trap than other forms. A given administration will want the good effects while the bad effects are postponed into a future administration. Eventually, the society must collapse or suffer the bad effects of repudiation. (Usually this means the administration of the collapse is blamed while the ones that caused the problem are still held in high regard.) I think the ``M2''is the better measure in the US.
But the total problem for democracies is that such thinking is not limited to money supply. This results in any crises developing, each with their cycle. When the part of the cycle where nature would want correction in many of the cycles coincide - societies collapse. That is what we're facing now. The crisis of 2007-8 was not corrected - Biden was elected. He started another crises which is only just in the early phase - moderate inflation.
Well, I will argue heuristically! For me the short answer is NO, but for more precision, I will say that the monetary policy conducted by the various central banks of the euro zone, without forgetting the FED in the United States, has only prolonged the persistence of the inflation and its magnitude (a Wicksellian term), central banks need to think outside the box; abandon the reflection of extremist monetarism à la Friedman. Current monetary policy attempts to stop inflation through a monetary variable, such as the interest rate. Indeed, the failure of central banks to lower inflation now reflects the non-purely monetary aspect of inflation! Let's take a look at the other side of the coin; the true side of the economy. Labor productivity has been falling since 2008 in the euro zone and in OECD countries, more sharply than in the United States; more workers for the same production! Without forgetting the decline and the slowness of the accumulation of capital which retains the product below its natural rate, as well as a moderate technological innovation. Finally, I think this inflation is pro-cyclical with some labor market hysteresis due to the current economic cycle slowing down (some inertia) attempts by policymakers, coupled with anchored (NON-rational) expectations to make monetary policy neutral. European governments must find solutions to improve labor productivity and encourage investment through shocks that will encourage savings in the first place in order to accumulate more capital on the infinite horizon, because I think the crisis will continu and that policymakers have to resort to unexpected financial and monetary policies (unexpected shoks).... solutions are in the models of the New Keynesians macroeconomics NKPC.
I wrote an article (04/12/2022) that analyzes your subject a little, titled:
The non-existence of an inflation-output trade-off under the rational expectations hypothesis as the cause of the steady state situation.
Overtaking attempt.
Dr. Abouderaz Sofiane.
Senior Lecturer in advanced macroeconomics.
University of Boumerdes, Algeria
Well, I will argue heuristically! For me the short answer is NO, but for more precision, I will say that the monetary policy conducted by the various central banks of the euro zone, without forgetting the FED in the United States, has only prolonged the persistence of the inflation and its magnitude (a Wicksellian term), central banks need to think outside the box; abandon the reflection of extremist monetarism à la Friedman. Current monetary policy attempts to stop inflation through a monetary variable, such as the interest rate. Indeed, the failure of central banks to lower inflation now reflects the non-purely monetary aspect of inflation! Let's take a look at the other side of the coin; the real side of the economy. Labor productivity has been falling since 2008 in the euro zone and in OECD countries, more sharply than in the United States; more workers for the same production! Without forgetting the decline and the slowness of the accumulation of capital which retains the product below its natural rate, as well as a moderate technological innovation. Finally, I think this inflation is pro-cyclical with some labor market hysteresis due to the current economic cycle slowing down (some inertia) attempts by policymakers, coupled with anchored (NON-rational) expectations to make monetary policy neutral. European governments must find solutions to improve labor productivity and encourage investment through shocks that will encourage savings in the first place in order to accumulate more capital on the infinite horizon, because I think the crisis will continu and that policymakers have to resort to unexpected financial and monetary policies (unexpected shoks).... solutions are in the models of the New Keynesians macroeconomics NKPC.
I wrote an article (04/12/2022) that analyzes your subject a little, titled:
The non-existence of an inflation-output trade-off under the rational expectations hypothesis as the cause of the steady state situation.
Overtaking attempt.
Dr. Abouderaz Sofiane.
Senior Lecturer in advanced macroeconomics.
University of Boumerdes, Algeria
IMO
There is a assumption in the question which makes the answer NO. That is that central (anything) bank/ government can actually have an effect curbing inflation. This seems to assume Keynesian type thought. The primary problem with Keynes thought is that a central government action may solve or change the overall natural actions of individuals IN THE LONG RUN.
Without going into details of models, one can evaluate the models by their results. Often the failure of models to predict the results resides in the postulates being incorrect. So, examine the ``trial-and-error'' of economic policy over the last few decades. Keynes created his model which included the Phillips curve - that inflation could reduce unemployment. Friedman and monetarists argued against this and predicted big problems. Well,, stagflation resulted in the Keynes big government policy and we say the first ``New Keynesian'' model (still big government policy but rejecting the Phillips curve). This ``New Keynesian'' model favored central control such as in the USSR. There were laudatory papers of the USSR system just weeks before the Berlin wall fell and a few years before the collapse of the USSR. So, a ``New, New Keynesian" model was needed without addressing the core issue. This model produced the 2008 collapse. Now there is a quest for the ``New, New, New, Keynesian" model which keeps the central control/government. I'm sure the next model will be laudatory by government. But the problem is that capitalism and the individual action of people seeking their own survival will not be modeled by any central model. The individual will seek advantage and that requires action slightly contrary to Keynesian model assumptions. People have been shown to be very inventive.
Government should try to not distort the natural processes. The problem is that natural processes punish failure with death (as opposed to bailout). Allowing such bad things is very difficult for humans.
John Hodge, thank you very much for your answer.
My reply will be precise on four definite points. Then; my first reply will be corrective: it is clear, is really very clear, in the economic literature that Keynes did not have the scoop to introduce the Phillips curve, further than that, Keynes did not even mention this relationship before its introduction into modern macroeconomic theory by William Phillips through his original 1958 paper, it was really the missing equation of the standard Keynesian model. This relationship was then reworked as an original Phillips curve (relation) in Solow and Samuelson's famous 1960 paper.
Second, Friedman was not completely anti-Keynesian; he was Keynesian in the short-run, with his validation of the expected augmented Phillips curve (EAPC), and so he was excommunicated (excommunicado, latin term) from the sanctuary of the classics and especially in the eyes of Lucas and Sargent. in the long-run, Friedman returns again to the church of the new classics by validating the neutrality of money!!!
In my third point, I really agree with you; people and more particularly economic agents will never agree to be modeled, but macroeconomic theory (mathematical and macroeconometric modeling) always tries to create models that explain the behavior of agents very precisely, and then to propose solutions to the problems to which agents are confronted. This point prompts me to mention a fourth point, on the real aspect of macro-econometric models. You know, dear John Hodge , the arena that has seen the most duel between economists and the mainstream is the arena of inflation-output (unemployment) trade-off . Without going into details, the rational expectations hypothesis, à la Lucas, is a mechanical hypothesis more than a real one, it always leads the economy to an infinite steady state situation (dead point!!!) even by canceling government intervention. For the new Keynesian macroeconomics the explanation of the trade-off dilemma comes from the non-purely monetary aspect of inflation, where productivity plays an important role in controlling inflation, on this point there is probably a reconciliation between the models of the new keynesians and the theory of friedman on the explanation of the labor market.
Thank you for your patience.
John Hodge if you have some time, you can check out my latest article titled (available on ResearchGate):
The non-existence of an inflation-output trade-off under the rational expectations hypothesis as the cause of the steady state situation.
Overtaking attempt.
thank you.
The effectiveness of central banking monetary policy in curbing inflation growth depends on a number of factors, including the strength of the economy, the level of government spending, and the level of money supply. As such, it is difficult to definitively answer whether or not the current central banking monetary policy is effective in curbing inflation growth. However, in general, central banks have a range of tools they can use to help manage inflation, including setting interest rates, controlling the money supply, and purchasing securities. As such, it is likely that the current central banking monetary policy is having some effect on inflation growth.
Sofiane Abouderaz
I already downloaded your paper.
I know I'm an outsider. IMO The problem with Keynesian is that there is an unstated assumption that a central anything (government, bank, etc.) can replace or control the ``natural'' process of people trying to survive and use resources. So, pre-1900 (well, some claim before Wilson - 1913) the government interference was to offer incentives such as the building of the railroad. The problem was the severe, occasional depressions usually lasting 3 years. The central economic policy with coercive power results in fewer depression but leads to longer and more severe crises. Attempts to soften the crisis causes a delay which only makes the next one more severe. The size of the debt is a measure of the coming severity. So, IMO, the solution is take the hit now and delete Keynesian thinking. But how? is a problem.
My only (and a poor one) suggestion is to make monetary policy a State not a federal concern and let the competition of states determine the best policies. However, in historical cases of government repudiation of debt, really harsh consequences follow. But they are coming anyhow.
John Hodge thank you ...
Thank you for your response, but let me say two things: first, Keynesian THOUGHT and its tools only came to revive the world economy drowned in darkness by the great depression of 1929. then, old Keynesianism was a solution to the problem, not its cause!!! Obviously, this crisis was the result of a traditional classical thought that sees that pure and perfect competition generates stability in the economy, this is not true, there is never pure and perfect competition, but a some monopoly still exists; there is a monopolistic competition that is unanimous in all economies and all markets, even in the United States and Europe. The second point; let me ask you a question: is a 2 euro coin without the portrait of pacifist Bertha von Suttner on the obverse (face) of the coin valuable to you ! ? Well Keynesian thought is like the 2 euro coin, macroeconomic theory is of little value without modern Keynesianism ... this thought is constantly evolving from Keynes and the post-Keynesians through the disequilibrium school (Axel Leijonhufvud, Edmond Malinvaud...) arriving at New Keynesian Macroeconomics.
Withe respect.
Thank you.
Dr. Abouderaz Sofiane.
John Hodge ,, Thank you, your opinion is valuable.
Thank you for your response, but let me say two things: first, Keynesian THOUGHT and its tools only came to revive the world economy drowned in darkness by the great depression of 1929. then, old Keynesianism was a solution to the problem, not its cause!!! Obviously, this crisis was the result of a traditional classical thought that sees that pure and perfect competition generates stability in the economy, this is not true, there is never pure and perfect competition, but a some monopoly still exists; there is a monopolistic competition that is unanimous in all economies and all markets, even in the United States and Europe. The second point; let me ask you a question: John Hodge is a 2 euro coin without the portrait of pacifist Bertha von Suttner on the obverse (face) of the coin valuable to you ! ? Or, it's like reading all of Alfred Hitchcock's horror stories to understand the world of psychopaths, without reading Edgar Allan Poe's double murder in the rue Morgue ... Our understanding of how killers think is incomplete and unclear. Well Keynesian thought is like the 2 euro coin, macroeconomic theory is of little value without modern Keynesianism or if you like, is like the horror story of double murder in the rue Morgue ... this thought is constantly evolving from Keynes and the post-Keynesians through the disequilibrium school (Axel Leijonhufvud, Edmond Malinvaud...) arriving at New Keynesian Macroeconomics.
With respect.
Thank you.
Dr. Abouderaz Sofiane.
Keynesian thought came after the government took on the role of directing the economy (I submit with TR, but others say Wilson in 1913 with the creation of the Federal Reserve) The 1930s depression seemed likea norman depression UNTIL the government stepped in a nd made it last 10+ years rather than the usual 3 years. Friedman in one of his papers addressed the gold issue in the 1930s.
On second thought, I think I should go a bit farther than my last post.
The early 1900s saw the increasing interdependence of economies than previously experienced by humanity. This has been termed ``globalization''. The more powerful governments changed from a natural competition-based/de-centralized form to the general concept of what a government's role is - directing and controlling the populas and resources. This is more centralized. By the 1930s in the US this resulted in a depression which was uncomfortable but had been experienced many times as part of the functioning of nature for better use of resources. The problem Big Government was facing is that the 3 years had passed (by 1933) and the depression had NOT abated as previously experienced. So, the BIG, BIG question was ``What big government economic policies were required by the developing unification/globalization of humanity?'' OMO Thus. Keynes addressed this issue as to find a way forward because the current system was failing (>3 years had passed). The length of the 1007-8 crisis has shown the solution has not been found. The problem has been stated with assumption that Big government is humanity's path to globalization and elimination of violent war. I suggest such a path requires humanity to have wisdom it doesn't have and in unlikely to get anytime soon. In the mean time, we repeat history. I suggest the key assumption that centralized government of economic issues is the wrong approach.
John Hodge I always learn from people like you, thank you for your reflection.
It is difficult to definitively answer the questions posed in the context of this particular country as the effectiveness of the current monetary policy of the National Bank of Poland in curbing inflation growth and/or effectively limiting inflation growth is heavily dependent on a range of factors, including the effectiveness of fiscal policies and the effectiveness of other economic policies. In general, the effectiveness of any central bank's monetary policy in curbing inflation growth and/or effectively limiting inflation growth can be evaluated by looking at the bank's decisions in terms of their ability to influence the money supply, credit availability, and interest rates. Central banks use a variety of tools to influence the money supply, such as open market operations and changes in reserve requirements. They also use a variety of instruments to influence credit availability, such as changes in the discount rate, and changes in the reserve requirements. Furthermore, central banks use a variety of tools to influence the interest rate, such as changes in the discount rate, and changes in the reserve requirements. In conclusion, it is difficult to definitively answer the questions posed in the context of the particular country discussed here, as the effectiveness of the current monetary policy of the National Bank of Poland in curbing inflation growth and/or effectively limiting inflation growth is heavily dependent on a range of factors.