That's what we mean by "symmetric adjustment" in Europe: higher inflation in the north:
Economics: Is higher inflation the most painless way to escape current economic troubles?: Oct 31st 2012 by R.A. | The Economist: Above-normal inflation has been proposed as a solution (or salve) to a number of the rich world's economic problems. In conjunction with financial repression, it could help erode sovereign debt loads. In the euro area, differential inflation could facilitate rebalancing. It could help lower real interest rates in economies up against the zero lower bound, and it could help facilitate real wage adjustments in economies plagued by nominal wage stickiness. Of course, there are risks to higher inflation, including efficiency costs and the possibility that "de-anchored" inflation expectations could be difficult and costly to contain.
Will the rich world use above-normal inflation as a way to address economic ills? Should it?
Guest contributions: 6
We need a normal price level Brad DeLong wrote on Oct 31st 2012, 12:18 GMT: I WOULDN'T say the world economy needs "above normal inflation". I would say that the world economy needs a price level that is at the level that people five years ago would have expected today. We need a normal price level. Given where we are starting from, that means we need above-normal inflation to offset the below-normal inflation we have had for the past five years….
Better to renege on citizens than on bondholders Ajay Shah wrote on Oct 31st 2012, 12:25 GMT: WE ARE in danger of losing sight of hard-won institutional achievements. For decades, rich countries have done a good job of delivering 2% inflation. By removing the fear of inflationary episodes, governments have obtained low-cost financing. In the short run, one can always cheat on bondholders once by triggering off an episode of inflation. In return, the bond market will mistrust the institutions of rich countries for many decades….
There is little scope for catch-up inflation John Makin wrote on Oct 31st 2012, 12:27 GMT: ABOVE-normal inflation may be appropriate when inflation has been below normal for a time as it was in Japan early in the millennium. It makes little sense when inflation has been around 2% as it has been in the US over much of the past decade. Pushing inflation to 3%, if it were possible given weak demand, would have little in the way of beneficial effects from lower real wages or lower real interest rates….
Higher inflation would only increase "short-termism" Michael Heise wrote on Oct 31st 2012, 15:33 GMT: VIEWED from Germany, I see no appetite for tinkering with inflation as a weapon to solve the world’s economic woes. Deliberately adding a dose of inflation to the already long list of economic headaches would be nothing short of reckless. And, like the sorcerer’s apprentice, inflation can prove hard to tame once unleashed. The arguments are well-rehearsed, covering the impact on interest rates (and government refinancing costs) once inflationary expectations rise, the penalisation of low wage groups and savers, supply side inefficiencies and more….
Higher inflation might provide Europe a short but costly reprieve Gilles Saint-Paul wrote on Nov 2nd 2012, 13:14 GMT: INFLATION would certainly deflate the real value of public debt in most countries. It would also reduce real interest rates, inducing people to spend more so as to get rid of their nominal assets, and may also reduce the cost of labour to the extent that workers have nominal wage contracts.
Yet this would be just a short-term fix and it would not address the structural problems. We have learned in the seventies that inflation only works if it is unanticipated. Otherwise it is reflected in higher nominal interest rates (notably on public debt) and in indexed wage contracts. As it is difficult to fool people more than once, after such a surprise inflation can then easily crawl into the two-digit zone and disinflation may be quite costly: to stop inflation the Fed had to plunge the US economy into a recession in the late seventies/early eighties….
More inflation would help, but probably won't be forthcoming Mark Thoma wrote on Nov 2nd 2012, 13:56 GMT: BOTH the US and Europe could benefit from temporary period of above-normal inflation. In Europe, a temporary increase in inflation would help countries struggling with sovereign-debt problems. It would also facilitate needed adjustments within the euro zone that are difficult to achieve when countries share a common currency. In the US, a period of above-normal inflation would provide needed stimulus to the economy by lowering real interest rates, making US exports more attractive, and reducing household debt loads.
Along with these benefits there are, of course, potential costs. As at the top of this page notes, these include both efficiency costs and the possibility that inflation expectations will become "de-anchored". However, the efficiency costs of a temporary increase in the inflation rate are relatively low—an extra percent or two for a period of time followed by a return to normal in the long-run won't do much damage.
I would like some clarification on the Franco-Germany Austerity Pain view: as I understand it, it:
- calls for a 2%/year inflation target for the Eurozone;
- calls for deflation in southern Europe;
- requires that inflation never exceed 2%/year in northern Europe.
This seems to me to have a very basic problem with arithmetic--much like the modern U.S. Republican Party.
