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 AvatarDavid-1 28th Feb - 4:40am
    Feelings of extreme guilt lead, as a measure of compensation, to dishonesty to oneself ("what I did wasn't so bad, probably even good if you...
  • User AvatarJohn Proffitt 28th Feb - 4:34am
    HM Armed Forces can be deployed at any time in the event of a crisis or an emergency. One must not forget that on completion...
  • User AvatarDavid Evans 28th Feb - 2:11am
    It is profoundly sad that so many Lib Dems still choose to pretend that it is all about the fairest scheme to fund Universities and...
  • User AvatarPhilip Rolle 28th Feb - 1:41am
    Every Lib Dems criticise Labour's policy on this, they enable the debate to be focused back onto "Clegg and the Lib Dems lied to you"....
  • User AvatarCharlie 28th Feb - 12:46am
    Rifkind/Straw's actions are just another examples of a decline in integrity : people want rank and reward but not responsibility. No manager at the BBC...
  • User Avatarmalc 28th Feb - 12:46am
    Duncan Scott This was a headline policy that had to be right in time for the GE, it doesn't matter how long it took to...
Sat 28th Feb 2015
Sun 1st Mar 2015
Mon 2nd Mar 2015
18:30
Wed 4th Mar 2015
Sat 7th Mar 2015
Sun 8th Mar 2015
Wed 11th Mar 2015
Fri 13th Mar 2015
Sat 14th Mar 2015
Wed 18th Mar 2015