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IMF / INFLATION
STORY: IMF / INFLATION
TRT: 1.33
SOURCE: IMF
RESTRICTIONS: NONE
LANGUAGE: ENGLISH / NATS
DATELINE: 9 APRIL, 2013 WASHINGTON, DC, UNITED STATES
RECENT, WASHINGTON, DC, UNITED STATES
1. Wide shot, exterior IMF headquarters
9 APRIL, 2013 WASHINGTON, DC, UNITED STATES
2. SOUNDBITE (English) Rupa Duttagupta, Research Department, IMF:
“The recent take-offs since the 1990s are based on a stronger economic footing as seen by external debt levels, domestic public debt levels fallen after take-off, inflation levels fallen after take-off. Whereas in the previous generation take-offs, these imbalances actually escalated or widened.”
3. Cutaway reporters
4. SOUNDBITE: (English) John Simon, Research Department, IMF:
“The benefits of the central bank doing as much as it can to hit its target are sufficient, and also its credibility as such, that it should not fear temporarily overshooting the target. So the idea here is that if you do, fine, but you end up closing output gap very quickly, and suddenly you get in a little bit of over-stimulation of the economy. With anchored expectations, the central banks can notice that reverse course, and there will be no lasting effect of that, because expectations have been anchored.”
5. Cutaway reporters
6. SOUNDBITE: (English) John Simon, Research Department, IMF:
“If the dog has been muzzled, you shouldn’t use it as a guard dog, which means that if you don’t see inflation rising or falling, that’s not necessarily a sign, but there is nothing to worry about. You need to adjust to this new reality where the dog isn’t barking nearly as much.”
7. Wide shot, press conference ends
International Monetary Fund (IMF) released two analytical chapters of World Economic Outlook (WEO) today. One looks at growth in low-income countries, and the other analyses inflation.
Low-income countries have bounced back in the past two decades. Analysis in the WEO suggests that dynamic low-income countries are on a stronger economic footing today than before the 1990s, and therefore better placed to stay on course.
After a first wave of growth takeoffs—expansion in per capita output for at least 5 years averaging at least 3 ½ percent a year—by low-income countries in the 1960s and early 1970s, there were fewer in the 1980s. Growth in many of these countries decelerated as global economic conditions deteriorated. A second wave of takeoffs started in the 1990s.
Rupa Duttagupta of the IMF’s Research Department said in today’s press conference: “The recent take-offs since the 1990s are based on a stronger economic footing as seen by external debt levels, domestic public debt levels fallen after take-off, inflation levels fallen after take-off. Whereas in the previous generation take-offs, these imbalances actually escalated or widened.”
Recent takeoffs have also seen a stronger record on structural reforms and institutions, such as a lower regulatory burden, better infrastructure, higher education levels, lower income inequality, and greater political stability.
If today’s dynamic low-income countries preserve momentum in their policy reforms, they are likely to avoid the setbacks that afflicted many of their predecessors.
Duttagupta stressed that sustained effort is needed to reduce imbalances, and confront many challenges, such as growth that is concentrated in a few sectors, or that has not yet translated into broad-based rise in living standards and declines in poverty levels.
John Simon lead the study on inflation, entitled “The Dog That Didn’t Bark: Has Inflation Been Mussled or Was It Just Sleeping?”
This chapter of WEO found that the stability of inflation in recent years reflects two key factors. First, inflation expectations have become more strongly anchored, or resistant to change, reflecting people’s confidence that inflation will remain close to the targets set by national central banks (see chart). Second, the response of inflation to changes in cyclical unemployment has become more muted.
Not only has inflation been stable during the recession, inflation was also remarkably steady during the strong economic expansion in the early 2000s. This was the case even in Spain, which by joining the euro area became subject to monetary policies that were too stimulative for its domestic economy. Despite the dramatic reduction in unemployment that resulted, inflation expectations, as well as actual inflation, remained remarkably well anchored.
When asked about European Central Bank’s monetary policy at the press conference, Simon said “The benefits of the central bank doing as much as it can to hit its target are sufficient,” and “it should not fear temporarily overshooting the target.”
“With anchored expectations, the central banks can notice that reverse course, and there will be no lasting effect of that, because expectations have been anchored,” he said.
In answering to another question on inflation as signs for worry, Simon used the dog analogy saying: “If the dog has been muzzled, you shouldn’t use it as a guard dog, which means that if you don’t see inflation rising or falling, that’s not necessarily a sign, but there is nothing to worry about. You need to adjust to this new reality where the dog isn’t barking nearly as much.”
The study concludes that as long as central banks are free from political constraints, stimulatory monetary policy is entirely appropriate given the economic slack in most advanced economies today.
The combination of a relatively flat Phillips curve—that is, a small response of inflation to unemployment fluctuations—and strongly anchored inflation expectations implies that any temporary overstimulation of the economy would have only small effects on inflation. Conversely, the costs of ongoing high Aunemployment are likely to be much greater.
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