CommentIsLinked@LDV: Tim Leunig – Co-ordinated inflation could bail us all out

Over at the Financial Times, Tim Leunig – occasional contributor to LDV, and reader in economics at the London School of Economics – considers the unusual financial origins of the current recession. Here’s an excerpt:

The global economy would benefit from a pre-announced, temporary, globally co-ordinated bout of moderate inflation. Since it takes about two years for central-bank policy fully to influence inflation, a sensible policy would be to target 4 per cent inflation for the five years from 2011, followed by 2 per cent thereafter. … An increase in inflation by an extra 2 percentage points for a period of five years would have many benefits – for governments, companies, households and the banking system. …

An extra 2 points of inflation for five years is not a “get out of jail free card”. Bank shareholders, rightly, will still lose greatly from their managers’ decisions. Future taxpayers will, inevitably, still bear most of the cost of counter-cyclical government spending. … The policy aims to improve the health of the banking system so growth can resume, while dividing the cost of paying for the mistakes of the past more equitably.

We can go too far. Inflation much above 4 per cent risks starting an inflationary spiral. Higher inflation for too long risks creating permanently higher expectations and stoking future booms. In addition, savers should not pay a disproportionate share of the cost of this recession. Advocating a policy that cannot be guaranteed to work, and that is neither costless nor riskless, is not usually sensible. It is a measure of the unusualness of this recession that such an idea is worth considering.

You can read the article in full at the FT’s website by clicking here.

Read more by or more about , , or .
This entry was posted in LibLink.
Bookmark the web address for this page or use the short url http://ldv.org.uk/11380 for Twitter and emails.
Advert

5 Comments

  • Can central banks target inflation that accurately? The Bank of England had missed its targets by 2% a few months ago.

  • Andrew Duffield 16th Feb '09 - 8:00am

    Sounds like you may be another convert to quantative easing Tim. Excellent news if so!

    Cutting interest rates is an utter waste of time when the problem all along has been the shortage of money in the economy. If that new money is free of interest bearing debt rather than borrowed, runaway inflation risks will actually be lower and government will be able to start managing the economy rather than the banks.

  • David Evans 16th Feb '09 - 2:04pm

    I agree with Mark. Those on fixed incomes (a large proportion of whom are old) will bail out the bankers, the government and the economists. It may be inevitable, but it is not a neat idea, simply a way of disguising failure and passing it on to those who will make the least fuss.

  • Is that the same Andrew Duffield that used to be a neighbour of mine late 90s/early 00s?

    If so, hello. Hope you’re well.

Post a Comment

Lib Dem Voice welcomes comments from everyone but we ask you to be polite, to be on topic and to be who you say you are. You can read our comments policy in full here. Please respect it and all readers of the site.

If you are a member of the party, you can have the Lib Dem Logo appear next to your comments to show this. You must be registered for our forum and can then login on this public site with the same username and password.

Your email is never published. Required fields are marked *

*
*
Please complete the name of this site, Liberal Democrat ...?

Advert



Recent Comments

  • User AvatarPeter Chegwyn 20th Dec - 2:12pm
    Dave G Fawcett is correct in saying there are still areas 'outside the bastions' where we continue to win council seats against the national trend....
  • User AvatarTsar Nicolas 20th Dec - 1:24pm
    Liberal Al The price of oil and gas are linked so if one goes up in price, so does the other, and vice-versa. If there...
  • User AvatarKen Palmerton 20th Dec - 1:23pm
    My heartfelt thanks to Robin for restarting this discussion amongst Liberals about the Citizens income. Its like stepping back to the 1940s when the Womens...
  • User AvatarPeter Chegwyn 20th Dec - 1:13pm
    Totally agree with David and Nigel. A wonderful tribute by Nick. There was another very moving tribute given at the funeral by Steve Atack which...
  • User AvatarDave G Fawcett 20th Dec - 1:00pm
    'outside the “bastions”, there is no party left either on the ground or at the ballot box.' Theakes, please don't write the rest of us...
  • User AvatarRichard Dean 20th Dec - 12:53pm
    Free petrol? Free cars? Bank of Mum and Dad? Drive on the right if you want? It's just that us workers have to make the...
Sat 20th Dec 2014
Sat 3rd Jan 2015
Wed 14th Jan 2015
Thu 15th Jan 2015
Fri 16th Jan 2015