Resumen de The beliefs of central bankers about inflation and the business cycle—and some reasons to question the faith
Although the U.S. Fed has recently created trillions of dollars through its purchases of Treasury Bonds and other securities, this has not had the usual inflationary consequences. The lesson from this experience is that inflation results from an increase in the supply of money over and above the demand to hold money. And this in turn implies that to be effective, any forecasting model of inflation, whether run inside or outside the Fed, must be provided with accurate estimates of the demand for as well as the supply of money, which is a formidable task given the extraordinary stock of excess over required cash reserves now held by U.S. banks.
Unlike the approach of the U.S. Fed, the monetary policy of South Africa's Reserve Bank does not appear to distinguish between the more or less temporary effects of supply-side shocks on inflation, such as those stemming from a weakening of the currency, from changes in the relatively permanent demand-side forces that drive prices higher or lower. Instead of ignoring such supply-side shocks, as Fed Chair Yellen has counselled the Fed to do, the Resbank has reacted to higher prices of whatever provenance in the same way, raising or lowering interest rates accordingly. This has made its policies highly pro-cyclical in an economy subject to dramatic exchange rate shocks that are independent of monetary policy settings.
But if the U.S. Fed has been right to ignore the effects of its policies on changes in the U.S. dollar, it has introduced another source of uncertainty. By postulating that only unexpected inflation is capable of stimulating economic activity, the Fed model makes a strong case for the benefits of highly consistent and predictable, central bank-influenced expectations of low inflation in maintaining economic growth and employment. But for all the wisdom of this policy, the Fed also appears to persist in believing in its own ability to engineer inflation surprises, with the intent of managing the business cycle. Experience tells us that such attempts at fine-tuning are almost certain to prove not only futile, but also incompatible with the Fed's own goals of predictable policy actions and reactions. These contradictions about the role that expectations and Fed-watching play in the economy lead toward a different policy prescription: namely, reliance upon monetary policy rules rather than policy discretion to minimize inflation and other surprises.
