Inflation is 'the dog that didn't bark': IMF
Central banks must not fear inflation when deciding to keep monetary policy loose if inflation expectations are well anchored, IMF economists say
Inflation is likely to remain stable as the recovery strengthens, as long-term expectations are firmly anchored due to credible central bank policies, John Simon, senior economist in the IMF's research department, said.
"Now it's very possible that we really are reaping the benefits of the low and stable inflation targets that central banks have set," Simon said in a news conference.
When the economic recovery strengthens, there will still be scope for unemployment to fall without flaring up inflation and, even if a central bank made a policy mistake, the consequences on inflation would not be great, he argued.
"When we're balancing the risks, the fear of high inflation in the future shouldn't prevent monetary policy from being accommodative now," Simon said.
The current frameworks of operation are like the one developed by the Bundesbank in the 1970s, a combination of flexible inflation targets and credibility, according to the IMF economist.
"You can make mistakes," he said. "The Bundesbank made mistakes but still managed to keep inflation low."
The European Central Bank should not be afraid of overshooting the inflation target temporarily if it means boosting economic growth and alleviating unemployment, Simon added.
"Taking that path would be a good course of action given the fact that there is such high, and rising, unemployment [in the eurozone]."
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The IMF economist, who led a team who produced a study about inflation under the headline "the dog that didn't bark," said quantitative easing was just a reflection of the fact that central banks were using the tools at their disposal.
Even the Bundesbank had a brief period of quantitative easing in the mid-70s, when it was worried about a recession, Simon said.
A crucial condition for maintaining stable inflation expectations is credibility, which can only be achieved by a central bank that is independent both in legal and in practical terms, he added.
However, just because inflation did not rise, it doesn't mean there is nothing wrong in the world economy, as imbalances occur elsewhere."If the dog's been muzzled, you shouldn't use it as a guard dog," Simon said.
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