Tinker, Tailor, Soldier - Awry? Assignment Problem in Disinflation Endeavours
Keywords:
Key Words: (dis)inflation, monetary and fiscal policies, accumulated debt, fiscal theory of price level, interest rate hikes JEL Classification: E31, E62, E63, H30, H68
Abstract
Abstract: Overcoming macroeconomic hurdles as a trade assumes that branches of government are almost continuously charged with various assignments, or particular tasks attached to a finite set of resources and talents owned by organisational subunits with decision rights in corrective policy-making. Even though open-economy cases of disinflation programmes reminded us quite a while ago that one task need not be assigned to one single resource exclusively, the overwhelming belief in mainstream macro to this day is that monetary policy remains chiefly responsible for both causing and stopping harmful inflation spirals. This paper, however, follows a novel wave of literature which doubly questions the aforementioned notion. It appears that the usual suspects for recent rise of inflation worldwide are found not guilty, hence we stand by the rare few who advocate that inflation in a modern non- Ricardian setting, when it finally spiraled out of control, represents but a legitimate and inevitable consequence of irresponsible fiscal policies and unsustainably high public (and private) debts. Moreover, due to familiar if reversed Fisherian effect, intermediated monetary restriction via interest rate hikes turns out to be unsafe, rather controversial reaction of central banks when it comes to reasonably swift and reliable preference for an outcome of such disinflation endeavours.
References
REFERENCES
• Аgarwal, R.-Kimball, M.(2022), «The Future of Inflation Part I: Will Inflation remain High?», Finance&Development Occasional Paper, IMF, Washington DC, April 7th.
• Azizirad, M. (2023), "Fisher vs Keynes: Does an Interest Rate Hike Cause Inflation to Increase or Decrease?", Simon Fraser University, mimeo.
• Ballabriga, F. (2004), "The Fiscal Theory of the Price Level", ESADE, Dept. of Economics, Universitat Ramon Llull, April, mimeo.
• Banerjee, R.-Boctor, V.-Mehrotra, A.-Zampolli, F. (2023), "Fiscal Sources of Inflation Risk in EMDEs: The Role of the External Chanell", BIS Working Paper #1110, Monetary and Economic Department, Bank for International Settlements, Basel, July.
• Bassetto, M. (2006), "Fiscal Theory of the Price Level", The New Palgrave Dictionary of Economics, Palgrave Macmillan, mimeo.
• Barro, R.-Bianchi, F. (2023), "Fiscal Influences on Inflation in OECD Countries: 2020-2022", NBER Working Paper #31838, Cambridge, MA, November.
• Bernanke, B.-Blanchard, O. (2023), "What caused the U.S. Pandemic-Era Inflation?", Hutchins Centre Working Paper #86, Brookings Institution, June.
• Blanchard, O. (2022), "Beyond the current Fight against Inflation: Fiscal Policy under low Rates", Peterson Institute for International Economics, December 1st, mimeo.
• Bohn, H. (1998), "The Behaviour of US Public Debt and Deficits", Quarterly Journal of Economics Vol. 113, pp. 949-964.
• Brandao-Marques, L.-Casiraghi, M.-Gelos, G.-Harrison, O.-Kamber, G. (2023), "Is High Debt constraining Monetary Policy? Evidence from Inflation Expectations", IMF Working Paper #143, June.
• Buiter, W. (2002), "The Fiscal Theory of Price Level: A Critique", The Economic Journal Vol. 112 (July), pp. 459-480.
• Buiter, W.-Sibert, A. (2018), "The Fallacy of the Fiscal Theory of Price Level- One last Time", Economics Vol. 12 Issue 1, pp. 1-56.
• Canzoneri, M.-Cumby, R.-Diba, B. (2001), "Is the Price Level determined by the Need of Fiscal Solvency", American Economic Review Vol. 91 Issue 5, pp. 1221-1238.
• Cochrane, J. (2023), «The Fiscal Theory of the Price Level», Princeton University Press, NJ, passim.
• Cochrane, J. (2023*),"Interest Rates and Inflation", Grumpy Economist Blog, August, mimeo.
• Croitoru, L. (2023), "How Inflation is a Policy Nowadays", Transylvanian Review of Administrative Sciences, No. 68, E, pp. 5-19.
• Eurostat (2023), "«Provision of deficit and debt data for 2022 – first notification», Euroindicators 47, April 21st, mimeo.
• Ferguson, T.-Storm, S. (2023), "Myth and Reality in the Great Inflation Debate: Supply Shocks and Wealth Effects in a Multipolar World Economy", International Journal of Political Economy, Volume 52, Issue 1, pp. 1-44, Taylor&Francis, April.
• Fix, B. (2023), "Interest Rates and Inflation: Knives Out", Economics from the Top Down, February 19th, mimeo.
• Issing, O. (2023), «Can the ECB escape its own Trap?», Project Syndicate, June 7th, mimeo.
• Konczal, M. (2023), "Inflation in 2023: Causes, Progress and Solutions", Testimony before the House Committee on Oversight and Accountability", March, mimeo.
• Korinek, A. -Stiglitz, J. (2022), «Macroeconomic Stabilisation for a Post-Pandemic World: Revising the Fiscal-Monetary Policy Mix and Correcting Macroeconomic Externalities», Hutchins Centre Working Paper #78, Brookings Institution, August.
• Kose, M.A.-Ohnsorge, F.-Ha, J. (2022), "From Stagflation to Debt Crisis", VoxEU and Centre for Economic Policy Research, 12th of July, mimeo.
• Leeper, E. (1991), "Equilibria under 'Active' and 'Passive' Monetary Policies", Journal of Monetary Economics Vol. 27 Issue 1, pp. 129-147.
• Lubik, T. (2022), "Analysing Fiscal Policy matters more than ever: The Fiscal Theory of the Price Level and Inflation", Federal Reserve Bank of Richmond Economic Brief No. 22, September.
• Malovic, M. (2014), "Money Theory and Monetary Policy in a Small Open Economy", Institute of Economic Sciences, Belgrade.
• Malovic, M.-Petrovic, V. (2023), "Political Economy of Disinflation: The Case of EMU", (in Serbian), EconBiz International Conference Proceedings, University of E. Sarajevo, forthcoming.
• McCallum, B.-Nelson, E. (2006), "Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences", NBER Working Paper #12089, Cambridge, MA, March.
• Nersisyan, Y.-Randall Wray, L. (2022), "What's causing Accelerating Inflation: Pandemic or Policy Response?", Levy Economics Institute Working Paper #1003, Bard College, Annadale-on-Hudson, NY, March.
• Оbstfeld, M. (2022), «Emerging-market and Developing Economies need Support amid rising Interest Rates», Peterson Institute for International Economics, October 6th, mimeo.
• Rogoff, K. (2023), "Higher Interest Rates are here to stay", Project Syndicate, December 5th, mimeo.
• Roubini, N. (2022), "More War means more Inflation", Project Syndicate, December 30th, mimeo.
• Roubini, N. (2022*), “The Unavoidable Crash”, Project Syndicate, December, mimeo.
• Schweitzer, J.-Khattar, R. (2022), "Wages and Employment Do Not Have To Decline To Bring Down Inflation", Centre for American Progress, NY, accessed September 1: https://www.americanprogress.org/article/wages-and-employment-do-not-have-to-decline-to-bring-down-inflation/
• Sims, C. (1994), "A Simple Model for the Study of Determination of the Price Level and the Interaction of Monetary and Fiscal Policy", Economic Theory Vol. 4, pp. 381-399.
• Spence, M. (2022), "Secular Inflation", Project Syndicate, October 12th, mimeo.
• Spence, M. (2022*), "Is it Time to give up on 1.5C?", Project Syndicate, December 23rd, mimeo.
• Storm, S. (2022), "Inflation in the Time of Corona and War", Institute for New Economic Thinking Working Paper #185, May 30th.
• Svensson, L. (2013), "“The Possible Unemployment Costs of Average Inflation Below a Credible Target”, NBER Working Paper 19442, Cambridge, MA, September.
• Tanner, E. C. (2019), "Disinflation, External Vulnerability and Fiscal Intransigence: Some Unpleasant Mundellian Arithmetic", Journal of Applied Economics, No 22, Issue 1, pp. 403-436.
• Woodford, M. (1995), "Price Level Determinacy without Control of a Monetary Aggregate", Carnegie-Rochester Conference Series on Public Policy Vol. 43, pp. 1-46.
• Woodford, M. (2003), "Interest&Prices - Foundations of a Theory of Monetary Policy", Princeton University Press, New Jersey.
• Аgarwal, R.-Kimball, M.(2022), «The Future of Inflation Part I: Will Inflation remain High?», Finance&Development Occasional Paper, IMF, Washington DC, April 7th.
• Azizirad, M. (2023), "Fisher vs Keynes: Does an Interest Rate Hike Cause Inflation to Increase or Decrease?", Simon Fraser University, mimeo.
• Ballabriga, F. (2004), "The Fiscal Theory of the Price Level", ESADE, Dept. of Economics, Universitat Ramon Llull, April, mimeo.
• Banerjee, R.-Boctor, V.-Mehrotra, A.-Zampolli, F. (2023), "Fiscal Sources of Inflation Risk in EMDEs: The Role of the External Chanell", BIS Working Paper #1110, Monetary and Economic Department, Bank for International Settlements, Basel, July.
• Bassetto, M. (2006), "Fiscal Theory of the Price Level", The New Palgrave Dictionary of Economics, Palgrave Macmillan, mimeo.
• Barro, R.-Bianchi, F. (2023), "Fiscal Influences on Inflation in OECD Countries: 2020-2022", NBER Working Paper #31838, Cambridge, MA, November.
• Bernanke, B.-Blanchard, O. (2023), "What caused the U.S. Pandemic-Era Inflation?", Hutchins Centre Working Paper #86, Brookings Institution, June.
• Blanchard, O. (2022), "Beyond the current Fight against Inflation: Fiscal Policy under low Rates", Peterson Institute for International Economics, December 1st, mimeo.
• Bohn, H. (1998), "The Behaviour of US Public Debt and Deficits", Quarterly Journal of Economics Vol. 113, pp. 949-964.
• Brandao-Marques, L.-Casiraghi, M.-Gelos, G.-Harrison, O.-Kamber, G. (2023), "Is High Debt constraining Monetary Policy? Evidence from Inflation Expectations", IMF Working Paper #143, June.
• Buiter, W. (2002), "The Fiscal Theory of Price Level: A Critique", The Economic Journal Vol. 112 (July), pp. 459-480.
• Buiter, W.-Sibert, A. (2018), "The Fallacy of the Fiscal Theory of Price Level- One last Time", Economics Vol. 12 Issue 1, pp. 1-56.
• Canzoneri, M.-Cumby, R.-Diba, B. (2001), "Is the Price Level determined by the Need of Fiscal Solvency", American Economic Review Vol. 91 Issue 5, pp. 1221-1238.
• Cochrane, J. (2023), «The Fiscal Theory of the Price Level», Princeton University Press, NJ, passim.
• Cochrane, J. (2023*),"Interest Rates and Inflation", Grumpy Economist Blog, August, mimeo.
• Croitoru, L. (2023), "How Inflation is a Policy Nowadays", Transylvanian Review of Administrative Sciences, No. 68, E, pp. 5-19.
• Eurostat (2023), "«Provision of deficit and debt data for 2022 – first notification», Euroindicators 47, April 21st, mimeo.
• Ferguson, T.-Storm, S. (2023), "Myth and Reality in the Great Inflation Debate: Supply Shocks and Wealth Effects in a Multipolar World Economy", International Journal of Political Economy, Volume 52, Issue 1, pp. 1-44, Taylor&Francis, April.
• Fix, B. (2023), "Interest Rates and Inflation: Knives Out", Economics from the Top Down, February 19th, mimeo.
• Issing, O. (2023), «Can the ECB escape its own Trap?», Project Syndicate, June 7th, mimeo.
• Konczal, M. (2023), "Inflation in 2023: Causes, Progress and Solutions", Testimony before the House Committee on Oversight and Accountability", March, mimeo.
• Korinek, A. -Stiglitz, J. (2022), «Macroeconomic Stabilisation for a Post-Pandemic World: Revising the Fiscal-Monetary Policy Mix and Correcting Macroeconomic Externalities», Hutchins Centre Working Paper #78, Brookings Institution, August.
• Kose, M.A.-Ohnsorge, F.-Ha, J. (2022), "From Stagflation to Debt Crisis", VoxEU and Centre for Economic Policy Research, 12th of July, mimeo.
• Leeper, E. (1991), "Equilibria under 'Active' and 'Passive' Monetary Policies", Journal of Monetary Economics Vol. 27 Issue 1, pp. 129-147.
• Lubik, T. (2022), "Analysing Fiscal Policy matters more than ever: The Fiscal Theory of the Price Level and Inflation", Federal Reserve Bank of Richmond Economic Brief No. 22, September.
• Malovic, M. (2014), "Money Theory and Monetary Policy in a Small Open Economy", Institute of Economic Sciences, Belgrade.
• Malovic, M.-Petrovic, V. (2023), "Political Economy of Disinflation: The Case of EMU", (in Serbian), EconBiz International Conference Proceedings, University of E. Sarajevo, forthcoming.
• McCallum, B.-Nelson, E. (2006), "Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences", NBER Working Paper #12089, Cambridge, MA, March.
• Nersisyan, Y.-Randall Wray, L. (2022), "What's causing Accelerating Inflation: Pandemic or Policy Response?", Levy Economics Institute Working Paper #1003, Bard College, Annadale-on-Hudson, NY, March.
• Оbstfeld, M. (2022), «Emerging-market and Developing Economies need Support amid rising Interest Rates», Peterson Institute for International Economics, October 6th, mimeo.
• Rogoff, K. (2023), "Higher Interest Rates are here to stay", Project Syndicate, December 5th, mimeo.
• Roubini, N. (2022), "More War means more Inflation", Project Syndicate, December 30th, mimeo.
• Roubini, N. (2022*), “The Unavoidable Crash”, Project Syndicate, December, mimeo.
• Schweitzer, J.-Khattar, R. (2022), "Wages and Employment Do Not Have To Decline To Bring Down Inflation", Centre for American Progress, NY, accessed September 1: https://www.americanprogress.org/article/wages-and-employment-do-not-have-to-decline-to-bring-down-inflation/
• Sims, C. (1994), "A Simple Model for the Study of Determination of the Price Level and the Interaction of Monetary and Fiscal Policy", Economic Theory Vol. 4, pp. 381-399.
• Spence, M. (2022), "Secular Inflation", Project Syndicate, October 12th, mimeo.
• Spence, M. (2022*), "Is it Time to give up on 1.5C?", Project Syndicate, December 23rd, mimeo.
• Storm, S. (2022), "Inflation in the Time of Corona and War", Institute for New Economic Thinking Working Paper #185, May 30th.
• Svensson, L. (2013), "“The Possible Unemployment Costs of Average Inflation Below a Credible Target”, NBER Working Paper 19442, Cambridge, MA, September.
• Tanner, E. C. (2019), "Disinflation, External Vulnerability and Fiscal Intransigence: Some Unpleasant Mundellian Arithmetic", Journal of Applied Economics, No 22, Issue 1, pp. 403-436.
• Woodford, M. (1995), "Price Level Determinacy without Control of a Monetary Aggregate", Carnegie-Rochester Conference Series on Public Policy Vol. 43, pp. 1-46.
• Woodford, M. (2003), "Interest&Prices - Foundations of a Theory of Monetary Policy", Princeton University Press, New Jersey.