2008-07-01

Here's a good question

If it is wrong for central banks to raise interest rates to reduce inflation if the inflation is sourced externally, then surely it would be just as wrong for central banks to lower interest rates in the face of low inflation that is also sourced externally.

I would suggest that while the former scenario is being debated, the latter one has already been experienced:

* The low inflation levels of the early 1980s can partly be explained by lower oil prices.
* The Federal Reserve's interest rate inaction during the late 1990s during a time of benign inflation and an investment boom in technology stocks (the low inflation was caused by a very strong dollar).

1 comment:

Dave Lankshear said...

That doesn't answer the question of what to do about inflation when the source is a global problem that is gradually gaining momentum and is going to hurt every industry and sector.

If oil were at $300 a day, would it even matter if Australia kept interest rates high? We're talking economic Armageddon and I'm just not sure the old rules apply any more.