Why are Central Banks using Economic Growth Control Mechanisms to Control Inflation?

[tommcginnis]

Someone please tell me how monetary policy can directly affect unemployment. Or even "maximize sustainable employment" in today's world. Please, also tell me what other central banks have this mandate?

It can't *directly* affect unemployment -- it falls under the oft-used aphorism of "pushing on a rope." That doesn't mean that Congress (in all it's 'wisdom') doesn't want the Federal Reserve to *try*. But 50 years ago, in a fit of Wanting To Do Something, it ended up in the Fed's enacting language -- it's "mandate". So it has to say it's tried.

So, fast-forward to 2008, and all of the moanings that went on for the previous 12-15 months are coming to fruition, and the economy is tanking. In order to *encourage* output, hiring, NOT-shutting-down, risk-taking, confidence-in-economic-stability-sufficient-to-merit-investment-debt, the Fed started cutting rates, and eventually, there was the whole T.A.R.P. business, "short-term facilities", the building of the Fed balance sheet, etc etc. What they were trying to do was to *at*least* take out any impediments to output and employment.

"Pushing on a rope" does not mean it's not going to work, it just means it's not very effective.
Here's the underlying idea:
https://en.wikipedia.org/wiki/Quantity_theory_of_money
The Fed's choice variables are basically limited to M, in
M*V = P*Q
so,
M = (P*Q)/V

If you assume V,velocity and Q,quantity are short-term fixed, then increasing the amount of M,money in the economy causes inflation, and reducing it causes deflation. With a collapse of output Q, the Fed had to get in front of declining P,prices to maintain monetary stability -- a dance of reducing interest rates while buying up every dollar of *quality* debt available, to shrink the M,money supply without shrinking Q. And dance nimbly they did!

But do they have the ability to *increase* Q?? Their choice variable(s) are pretty much limited to M,money. They can make it *attractive* as possible to have Q grow, they can remove impediments, but they can't *make*it* happen. So,
"Pushing on a rope."
(Wow -- I just googled that phrase with 'Federal Reserve' attached: a lot of history there...!)

 

[zdreg]

your reply is a serious response. however, money policy affecting employment is a discredited theory. nearly every two bit dictator in SA and in Africa has tried it, by printing money. the result has been and likely will always be runway or hyper-inflation.

 

[morganist]

how about back to basics like printing less money and less borrowing?
"There are other mechanisms which can control inflation."
correct, but no political will to control inflation. it is all a scam to enrich the politicians and fool the chumps who pay for it. the middle class.

They're more serious about it than you might think. I have been using pension tax alterations to control inflation in the UK. If you have a look at pension tax relief allowances and regulation changes over the last few years in the UK you will see it has changed dramatically.

If you have had the same thing in the US then it would indicate America has been using my technique of using pension reform to control inflation. My question is have you had a lot of pension reforms in the US? If so the work I have been doing the UK may have influenced it.

 

[ironchef]

your reply is a serious response. however, money policy affecting employment is a discredited theory. nearly every two bit dictator in SA and in Africa has tried it, by printing money. the result has been and likely will always be runway or hyper-inflation.

US and EU printed trillions of dollars/euros... Where is the hyper-inflations in US and EU?

Not arguing with you, just puzzled and trying to understand economic 101.

 

[zdreg]

under the circumstances your question is fair enough.




The Equation of Exchange addresses the relationship between money and price level, and between money and nominal GDP.

The equation simply states: M x V = P x Y

Where M = the money supply, usually the M1

V = the velocity of money

P = the price level

Y = real output, or real GDP.
if v declines hyperinflation may not result. if people or banks hoard money the V- velocity of money declines.

 

[ironchef]

under the circumstances your question is fair enough.




The Equation of Exchange addresses the relationship between money and price level, and between money and nominal GDP.

The equation simply states: M x V = P x Y

Where M = the money supply, usually the M1

V = the velocity of money

P = the price level

Y = real output, or real GDP.
if v declines hyperinflation may not result. if people or banks hoard money the V- velocity of money declines.

I don't know of a single one of my friends, or for that matter, any banks hoarding money? In fact I think we small retails are all taking on more debt.