- 2018-09-20
Why is there no inflation in the world?
In 2018, global central banks gradually withdrew from quantitative easing QE, and even started to raise interest rates.
Before this wave of global interest rate hikes started, a debate at the World Economic Forum in Davos had already begun a verbal battle-Dario, founder of the world's largest hedge fund Bridgewater Fund, and UBS Chairman of the Board of Directors Webber Station On the “market pie” side, the central bank thinks that the central bank should rethink the old policy framework; Sweden’s central bank vice governor Skinsley and ECB executive committee member Cole defend the classic framework of the “central bank pie”; and the National Institute of Finance of Tsinghua University Zhu Min, the dean and former vice president of the International Monetary Fund, took the stand of a scholar and became the mediator of the audience.
Dario asked the two central bankers on the scene-"If you are given two opportunities to make mistakes, one is to allow inflation to overshoot by 0.5% to 2.5% (that is, to postpone austerity), and the other is to let the economy go down (that is, to postpone austerity). When inflation approaches the 2% target, it begins to tighten, or it will lead to an economic downturn), which one would you choose?"
In this regard, Cole seems to feel very helpless. In his view, achieving price stability is the statutory mission of the central bank and has legal effects. In addition, the central bank cannot play much role in economic growth. "When the economy is expanding at a high speed, we must be wary of the'tail risk' of higher-than-expected inflation. However, the ability of monetary policy is limited and fiscal policy is required to play a greater role.
Zhu Min believes, "The important question now is, how will this long economic expansion cycle end? Can we achieve a soft landing?"
Since the 1990s, the monetary policy trend of some countries in the world has been an inflation targeting system, especially after the world financial crisis, governments and central banks have continued to implement non-traditional monetary policies of quantitative easing, accumulating huge amounts of money and debt. The outlook for world economic growth is still uncertain, and the debt/income ratio continues to rise. In particular, fiscal deficits are posing a real threat. If the monetary authorities of various countries continue to monetize government debt, we will face a period of worldwide inflation. Our policy recommendation is to formulate a medium-term inflation target, and use the currency quantity parameter as an intermediary tool for early warning and regulation, and to flexibly take into account other targets within a reasonable range of inflation, as well as the coordination of monetary policy and fiscal policy.
An inflation targeting system
Generally speaking, the multiple goals of monetary policy are unrealistic wishful thinking. The correct idea is that the government can maintain the reasonable stability of the internal value of the currency through monetary policy, so as to achieve the core goal of price stability. This price is represented by the retail price index. . However, neither the physical currency system, the legal paper currency system with fixed or floating exchange rate systems, and various mixtures, etc., can completely guarantee price stability. Especially since countries around the world have implemented a non-convertible paper currency system under floating exchange rates, after the severe inflation in the 1970s, the monetary authorities of many countries have begun to control inflation as the ultimate goal of their monetary policy.
New Zealand was the first country to implement an inflation targeting system. In December 1989, the New Zealand Parliament passed the New Zealand Reserve Bank Act. In 1990, the inflation targeting system was formally adopted. As of the beginning of 2011, the monetary authorities of 27 countries in the world have officially adopted the complete inflation target system (including 9 developed and industrialized countries, 18 developing countries and emerging economies). The specific timing and inflation targets are shown in the figure One. At the same time, there are also some central banks that explicitly regard price stability as the fundamental goal of monetary policy, such as the European Central Bank, the Swiss National Bank, and the Federal Reserve.
In Latin America, many developing countries also began to shift to an inflation targeting system in the early 1990s, especially after the Mexican financial crisis and the Latin American debt crisis, until the beginning of the 21st century. The 1998 Southeast Asian financial crisis also prompted some Asian countries to adopt an inflation targeting system.
As for the inflation target as a monetary policy paradigm, there seem to be some principled differences among scholars. Generally speaking, the inflation target is made as a monetary policy paradigm, which has a concise, single and focused target, good openness and transparency. At the same time, as an operating framework, it also has a broad space for discretionary decisions through the set of intermediate variables and combined with macroeconomic control tools. Therefore, the advantages of making inflation targets as monetary policy are obvious.
Withdrawing from the quantitative easing policy will cause various problems, but not withdrawing will ultimately be a liquidity preference and thus the collapse of the monetary system. The outlook for world economic growth is still uncertain, and the debt/income ratio continues to rise. In particular, fiscal deficits are posing a real threat. If the monetary authorities of various countries continue to monetize government debt (finance government expenditures through currency creation), we must Will face a period of worldwide inflation. It is also in this sense that we believe that the surge in government spending as a share of GDP is the main cause of long-term inflation. For example, in the 1970s, inflationary pressures in the United States mainly occurred during a period when government spending as a share of GDP expanded sharply. Therefore, the occurrence of severe or even vicious inflation in some countries in the next ten years will be a high probability event. Whether it is using inflation to stimulate economic recovery or the goal of exiting from non-traditional monetary policy, controlling inflation within a reasonable range is a top priority for the monetary authorities of various countries. China should also switch its monetary policy from quantitative or interest rate control to an inflation targeting system as soon as possible.