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    Monetary policy and the status quo

    Fatih Özatay, PhD20 January 2011 - Okunma Sayısı: 985


    Monetary policy facilitates change in the status quo. The status quo cannot be influenced via interest rate policies.

    Finally in yesterday I have sent the textbook I have been working on for more than a year to the publisher firm. I hope that I have nothing to do but control the next rehearsal. 'I hope' because over the last months I read nothing but academic articles that would be of use for the book. In a book or symposium report, I cannot remember which one it was due to the above mentioned fact that I read nothing but academic articles on my book, I came across a discussion about how important it is to abolish the inflation targeting. I have heard about this argument also in another platform recently.

    I started thinking what the justifications for this argument could be. The first question in my mind was 'Do they believe that fight against inflation is harmful for masses?' I decided that this could not be the reason since it is known that inflation disturbs income distribution. Those who are harmed the most by inflation are those with no bargaining power; i.e. those in informal employment, the retired, the unemployed as well as a significant proportion of the working population. 

    To what do they oppose?
    Since the justification for this argument cannot be that inflation is harmful for masses, it is time to pose a second question. Is it fighting against inflation via inflation targeting method rather than the fight against inflation in itself what they oppose to? If so, they should have come up with another policy option. When I checked the literature on this subject, I came up with the following options:

    Monetary control, fixed exchange rate regime, monetary board system, to overthrow the domestic currency and announce that another currency will be used as the official currency. I decided that the opponents could not be defending one of these options. For instance, if some restrictions are introduced on the balance sheet of the central bank (if some sort of monetary control is imposed), as was the case in the past nothing would change in essence. So they must have a 'deeper' purpose for opposing to the current regime.

    Then, their justification most probably goes as follows: they must be of belief that a central bank implementing inflation targeting policy does not pay attention to reducing unemployment. If so, it would be more than natural that they oppose to the inflation targeting regime. So, here comes my next question: Does a central bank implementing inflation targeting regime is note concerned with anything else? 

    The essence is what matters
    All articles on the issue at question takes departure from the same point: A central bank implementing inflation targeting regimes tries to make inflation rate converge to the targeted level on the one hand and to secure that unemployment rate does not reach above the level considered to be 'natural' by the general public.

    Then, the justification for the opposition to inflation targeting regime cannot be the belief that inflation targeting regime overlooks the problem of unemployment, either. There must be another reason. Maybe, they argue that the central bank, via changes in the monetary policy, must reduce the 'normal' unemployment rate.

    I think this argumentation is also 'weird'. After all, how can you reduce the 'normal' unemployment rate without implementing structural reforms under a number of policy areas: to secure a more favorable investment climate, improve the skills level of the labor force, teach generations to internalize science and technology to a higher degree, enable small enterprises to have access to finance for growth and so forth?

    In my humble opinion, I would like to remind the opponents of inflation targeting regime that what matters is the essence, not the inflation targeting regime. And the essence of the issue is monetary policy contributes to stability. It secures the circumstances necessary for changing the status quo. And the status quo is a deeper concept that cannot be influenced via interest rate decisions.

     

    This commentary was published in Radikal daily on 20.01.2011

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