Inflation Bias And The Hydra

In the advanced macro paper I’m taking this trimester, we’ve been working through the IS-PC-MR model.

I am still not convinced that central bankers can be more effective than Gosplan in the Soviet Union. The Reserve Bank’s greatest achievement is presiding over a relatively lower rate of purchasing power decline than in countries that do not pursue inflation targeting. Purchasing power is still going down, but by less than what it used to.

Arguments about technology making this all OK are Caplanistic. During my lifetime, a bundle of goods that cost $10,000 would now cost over $16,300. According to the Reserve Bank inflation calculator, purchasing power has declined by 38.7% during my brief lifetime alone.

Is price stability best left to a conservative central banker, like the Barro-Gordon model would lead us to believe, or to less intervention in the economy?

It is disturbing that most of the advocates of intervention miss completely that the situations that “require” intervention are merely the byproduct of excessive intervention in the first place.

Goods with less intervention in their respective markets seem to have substantial track records of price deflation and innovation – televisions, computers, cellphones.

Because of our love affair with democracy, it is simply not possible for time consistent policy to ever occur either in fiscal policy or monetary policy. This is what leads people like Peter Orszag, former OMB director, to argue for a global bureaucratic elite. (I am not a fan.)

The unique political outcomes derived from an MMP electoral system mean that the hydra (NZ First, Labour, Green) is likely to form the base of the next government.

They are as likely to think about time consistency of monetary policy as embrace additional offshore energy projects.

I am thinking quite hard about how to run a “purchasing power decline” test: central bankers vs. absolutist monarchs. Who debased the currency more I wonder?

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