An interview with Hyun Song Shin, economic adviser and head of research at the BIS, reposted in the BIS web site reminds us of the strange and heterodox views that the BIS (and others) have about the behavior of inflation. The views run contrary to most of what we all teach about inflation. They can only be understood if one has a very special and radical view on what determines inflation and are supported by a unique reading of the data. You probably need to read the whole interview to understand what I mean but here is a summary of the new BIS theory of inflation:
1. Inflation is a global phenomenon, not a national one. Monetary policy has very little influence on inflation, demographics and globalization are much more relevant factors.
2. The idea that monetary policy affects demand and possibly inflation is a "short-term" story that is too simple to understand the recent behavior of inflation.
3. Deflation is not that bad. The Great Depression is a special historical event that holds no lessons for what we have witnessed during the Great Recession.
4. While central banks are powerless at controlling domestic inflation, they are very powerful at distorting interest rates and rates of returns for long periods of time (decades).
5. Central banks have a problem when inflation is the only goal (they end up creating distortions in financial markets).
6. Monetary policy is a cause of all China's problems (he admits that there are other causes as well).
In summary, central banks are evil. Their only goal is to control inflation but they cannot really control it and because of their superpowers to distort all interest rates they only end up causing volatility and crises. And this is coming from an organization whose members are central banks and its mission is "to serve central banks". Surreal.
Antonio Fatás
Sunday, January 10, 2016
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