The Issue of Inflation Control as an Objectice of Central Banks Essay e

The Issue of Inflation Control as an Objectice of Central Banks This paper looks at the issue of inflation control as an objective of central banks. Viewing the British Commonwealth and Continental European models of ‘zero inflation’ in contrast with the moderate inflation policy of the US provides a case against zero inflation as a policy objective. A variety of issues that surround inflation; e.g., the inflation/unemployment relationship, etc, will be brought to the fore. In the final analysis, it is clear that efforts to eradicate inflation are misguided and more moderate inflation is preferable in an era where steady economic growth is desirable. Introduction Hyper inflation has plagued most of the world’s developing countries over the past decades. Countries in the industrialised world, too, have at times duelled with dangerously high inflation rates in the post WWII era. With varying degrees of success, all have employed great efforts to bring their inflation rates within acceptable limits. Generally, a moderate rate of inflation has been the ultimate goal. More recently, however, a few countries have pursued policies that strive to eradicate inflation altogether through complete price stability. This has proven to be a contentious enterprise, which clearly indicates that there is still no universally accepted solution to the inflation problem. Indeed, there is not even an agreed consensus regarding the source of inflation itself. The monetarist perception that the root of inflation is solely the excessive creation of money remains. So too does the belief that inflation originates in the labour market. And amongst a variety of others, the opinion that inflation â€Å"serves the critical social purpose of resolving incompatible demands by different groups† is also strong. This last, and more widely accepted, case shows that the problem is hardly a technical one; but rather a political one. It highlights the now unquestionable fact that politics and inflation are inextricably linked. And as with all inherently political issues, consensus is difficult, if not impossible, to achieve. But, political characteristics do provide flexibility. In some countries, high rates of inflation have clearly been compatible with rapid economic growth and fast rising standards of living. In such cases, it is quite reasonable to suggest that higher r... ...n and France. And unless the elusive benefits of zero inflation soon manifest themselves, it is only a matter of time before the rest of the ‘no inflation’ pack realises they are barking up the wrong tree. Bibliography: Akerlof, George., Dickens, William., Perry, George., ‘The Macroeconomics of Low Inflation’., Brookings Papers on Economic Activity (1996 NI) Dale, Reginald., ‘Zero Inflation is Not a Great Idea’., International Herald Tribune (Tuesday, September 10, 1996) Fortin, Pierre, ‘The Canadian Fiscal Problem: The Macroeconomic Connection’ in Lars Osberg and Pierre Fortin (eds.), Unnecessary Debts (Lorimer, 1996) Fortin, Pierre., ‘The Great Canadian Slump’., Canadian Journal of Economics (November 1996) Freedman, Charles, ‘The Role of Monetary Conditions and the Monetary Conditions Index in the Conduct of Policy’., in Bank of Canada Review (Autumn 1995) Friedman, Milton., ‘The Role of Monetary Policy’., American Economic Review (March, 1968) Frisch, Helmut., Theories of Inflation (Cambridge University Press, New York, 1983) Lovewell, Mark., ‘Getting to Zero: Bank of Canada Policy in Context’., in Bank of Canada Review (Autumn 1996)