Tuesday, May 8, 2012

The Job of the Central Bank

Professor Chinn over at Econbrowser calls for conditional inflation.  She's totally right, of course, but its never going to happen, because the central banks of the western world seem to have collectively decided that their job is to promote stable and low inflation.

The job of any governmental institution is to safeguard the wellbeing of the citizens.  Generally we set more concrete goals so that something gets done, but the central bank deciding that their job is to keep low inflation (rather than use low inflation to keep the economy running smoothly) is like the police deciding that arrests are their ultimate job (rather than using arrests to maintain law, order and ultimately safety) or the fire department deciding that their ultimate job is to soak a certain number of houses every month, rather than use their fire hoses to keep houses from burning down as needed.

Seriously, have a conversation with a well educated inflation hawk some time, I guarantee it will blow your mind.  You will get one of two explanations:

  1. Inflation is bad.  Because inflation is bad.  We don't want inflation, that's bad, what are you, crazy?
  2. Inflation is bad.  Because remember 1975-1983?  Inflation was bad, and we had to take extreme measures to stop it.  Haven't you heard of the recession of '82?  It was awful, there was lots of unemployment!
To be clear, inflation is bad, either because it is (and you must be crazy if you think otherwise) or because reigning it in causes unemployment.  You know, don't call the fire department.  They might get the house wet.

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