A Quote by Janet Yellen
A crucial responsibility of any central bank is to control inflation, the average rate of increase in the prices of a broad group of goods and services.
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There is no such thing as agflation. Rising commodity prices, or increases in any prices, do not cause inflation. Inflation is what causes prices to rise. Of course, in market economies, prices for individual goods and services rise and fall based on changes in supply and demand, but it is only through inflation that prices rise in aggregate.
Models used to describe and predict inflation commonly distinguish between changes in food and energy prices - which enter into total inflation - and movements in the prices of other goods and services - that is, core inflation.
Since World War II, inflation - the apparently inexorable rise in the prices of goods and services - has been the bane of central bankers.
The lesson for Asia is; if you have a central bank, have a floating exchange rate; if you want to have a fixed exchange rate, abolish your central bank and adopt a currency board instead. Either extreme; a fixed exchange rate through a currency board, but no central bank, or a central bank plus truly floating exchange rates; either of those is a tenable arrangement. But a pegged exchange rate with a central bank is a recipe for trouble.
The Central Bank should take into account other things as well: the stability of the bank system in the country, the increase or decrease of money supply in the economy, its influence on inflation.
The stability of the rate is the main issue and the Central Bank manages to ensure it one way or another. This was finally achieved after the Central Bank switched to a floating national currency exchange rate.
They flooded liquidity in the marketplace but the mortgage rate is based much more on expectations of inflation. So if the average investor believes that there is inflation coming, they'll move that rate up.
The idea that when people see prices falling they will stop buying those cheaper goods or cheaper food does not make much sense. And aiming for 2 percent inflation every year means that after a decade prices are more than 25 percent higher and the price level doubles every generation. That is not price stability, yet they call it price stability. I just do not understand central banks wanting a little inflation.
So: if the chronic inflation undergone by Americans, and in almost every other country, is caused by the continuing creation of new money, and if in each country its governmental "Central Bank" (in the United States, the Federal Reserve) is the sole monopoly source and creator of all money, who then is responsible for the blight of inflation? Who except the very institution that is solely empowered to create money, that is, the Fed (and the Bank of England, and the Bank of Italy, and other central banks) itself?
The best way that a central bank can support growth on a durable basis is to ensure inflation is low, stable - there is financial stability - and that is the role that the central bank plays.
My bottom line is that monetary policy should react to rising prices for houses or other assets only insofar as they affect the central bank's goal variables - output, employment, and inflation.
What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation.
The principle that a central bank, charged with controlling inflation, should be independent from the government is unassailable. It may also be true that it's easier for the central bank to guard its independence from political pressure when it mainly holds government securities.
What central banks can control is a base and one way they can control the base is via manipulating a particular interest rate, such as a Federal Funds rate, the overnight rate at which banks lend to one another. But they use that control to control what happens to the quantity of money. There is no disagreement.
I have read a great deal of economic theory for over 50 years now, but have found only one economic "law" to which I can find NO exceptions: Where the State prevents a free market, by banning any form of goods or services, consumer demand will create a black market for those goods or services, at vastly higher prices. Can YOU think of a single exception to this law?
If you're a poor worker - this is for new workers coming into the workplace - your benefits will increase at the current rate of increase. If you're a wealthier worker, your benefits would increase at the rate of inflation. And those changes would affect positively the unfunded liabilities inherent in Social Security.
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