monetary policy

Stagflation Threat: Be Pragmatic, Not Dogmatic

Mar, 03/22/2022 - 14:56 -- bacosta

“If your only tool is a hammer, every problem looks like a nail”. Still haunted by the clever preaching of monetarist guru Milton Friedman’s ghost, all too many monetary authorities address every inflationary threat or sign they see by raising interest rates.

Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon” still defines the orthodoxy. Despite changed circumstances in the world today, for Friedmanites, inflation must be curbed by monetary tightening, especially interest rate hikes.

Is the best monetary policy the one that does not control inflation? What does the ECB say?

Sáb, 02/19/2022 - 17:00 -- bacosta

Recent statements by Christine Lagarde, President of the European Central Bank (ECB), say that post-confinement inflation remains outside their influence. Its sources are the recovery of demand and border upheavals, she says. The ECB, like the Fed, combats the economic effects of the pandemic with large injections of liquidity into the markets and improvements in financial conditions. However, the latest monetary policy statement left aside price stabilisation, its only mandate. Does this mean that the ECB will sit back and watch inflation decimate purchasing power?

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The long road to monetary policy normalisation

Jue, 01/20/2022 - 20:32 -- anegrete

The monetary policy responses to the economic and health crisis due to covid-19 were to lower interest rates, the historical amounts of liquidity injected by central banks, and loans to the financial sector.

The implemented monetary policy, known as "quantitative easing", had the objective of halting the fall of the stock market, stimulating consumption, investment and employment which, in turn, would favor economic recovery.

The upcoming normalization of monetary policy will be a challenge for central banks. The experience gained with the 2008 crisis shows that normalization is a medium and long-term policy and there is uncertainty about what, how and when it will be.

The most expensive christmas of the century (so far)

Mar, 01/18/2022 - 13:54 -- anegrete

Globally, inflation closed 2021 at its highest level in the last twenty years (40 years in the case of the US) and projections indicate that during 2022. However, even if it is lower than last year, we will continue to see it high in 2022. Why is it a top concern for governments, central banks and consumers?

Governments are concerned that central banks will speed up the normalization of interest rates in the face of high inflation rates. This would put a brake on economic recovery and job creation and, in some cases, would cause the deterioration of the fiscal balances of some countries that acquired debt to mitigate the effects of the economic contraction or slowdown.

The strategies followed by governments and central banks to control inflation will determine the economic conditions of the coming years and the ability of the world to recover from the economic contraction of 2020.

The complexity of post-lockdown inflation

Vie, 11/19/2021 - 10:51 -- anegrete

Since economic activity resumed after the lockdowns, high rates of inflation have been observed around the world, although some monetary authorities have indicated that it is transitory. . The integration of global value chains, the magnitude of international trade and the productive and financial interdependence have shaped this post-confinement inflation.

Inflation is far from transitory, companies are facing a combination of supply chain challenges, as well as higher costs for energy, raw materials, packaging and shipping, all while becoming one of the biggest concerns of consumers around the world.

Central banks have taken a more aggressive stance. US Fed officials accepted that high inflation, which has risen to 5 percent, will be long-lasting. These measures are contractive, contrary to the much desired recovery of the product.

The elephant in the room

Jue, 11/04/2021 - 18:42 -- anegrete

The reasoning of modern monetary theory holds that countries with reserve currencies can maintain unlimited levels of fiscal deficits and public debt because they have financing available. The evidence, however, shows that massive deficits do not mean economic dynamism in the US.

After 2008, federal deficits have doubled from about 60% of GDP to about 120%. Emerging nations shift their resources to China through the US deficit instead of growing, since the world is one and the borders are all open, and trade is unrestricted.

US debt in nominal amounts is more than that of the rest of the world combined. So monetary inflation exists and hits first the most deficit countries, then the least, and finally the rest of the world as imported inflation.

Cryptocurrencies in Latin America

Jue, 04/29/2021 - 11:26 -- anegrete

Globally, the use of cryptocurrencies is on the rise. In Latin America there has been an increase in the use and awareness of new digital currencies.

There are different ways of looking at the causes of the increase in the use and acceptance of cryptocurrencies in Latin America: accessibility due to their anonymity; the security they generate among citizens due to the economic crises in their countries; and the incentives they offer to evade institutions.

The depreciation of the dollar due to expansive monetary policies is leading to this currency being abandoned as a reserve currency in some countries and, above all, is in the process of opening a large market for these cryptocurrencies.

Money as a commodity

Mar, 03/23/2021 - 14:42 -- anegrete

One year after the global closure due to COVID-19, exchange rates responded to financial markets more than to macroeconomic conditions. This is due to the depth that financialization has reached in the economy and the influence that the Fed's policies have on international markets.

Unlike the textbooks, where exchange rates are a reflection of economic growth, inflation and international reserves, the relationship of the exchange rate with these national variables is increasingly questionable.

Central bank intervention in exchange rates has been minimal. When the exchange rate responds more to financial variables than to real ones, the depth and degree of development of each country's financial sector is more important.

 

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