Central Banks’ obsession with price stability leads to economic instability

Frank Shotsak warns against the price stability obsession, He says in all this thinking behind inflation obsession, we ignore distributional aspects of monetary policy.

At the root of price stabilization policies is a view that money is neutral. Changes in money only have an effect on the price level while having no effect whatsoever on the real economy. In this way of thinking changes in the relative prices of goods and services are established without the aid of money.

When new money is injected there are always first recipients of the newly injected money who benefit from this injection. The first recipients with more money at their disposal can now acquire a greater amount of goods while the prices of these goods are still unchanged.

As money starts to move around the prices of goods begin to rise. Consequently the late receivers benefit to a lesser extent from monetary injections or may even find that most prices have risen so much that they can now afford fewer goods.

Increases in money supply lead to a redistribution of real wealth from later recipients, or non-recipients of money to the earlier recipients. Obviously this shift in real wealth alters individuals demands for goods and services and in turn alters the relative prices of goods and services.

Changes in money supply sets in motion new dynamics that give rise to changes in demands for goods and to changes in their relative prices. Hence, changes in money supply cannot be neutral as far as relative prices of goods are concerned.

This obsession dumbed us during both the previous serious crashes in 1929 and 2008. Central banks ignored these risks as inflation was subdued..

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One Response to “Central Banks’ obsession with price stability leads to economic instability”

  1. Anantha Nageswaran Says:

    I have been writing about and teaching on this topic for several years. I agree. But, there is no sign of rethink.

    I hope you saw the blog post:

    https://thegoldstandardsite.wordpress.com/2017/05/04/is-modern-central-banking-an-elaborate-waste-of-time/

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