Anti-inflation monetary policy

Written by stanley goff
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Anti-inflation monetary policy
Monetary management of the economy (dollars image by peter Hires Images from Fotolia.com)

Anti-inflation policy is carried out by central banks. It uses increases in interest rates to hold down price inflation. Increased interest is employed to slow down investment and hiring and lowering wages, which are seen as the culprit in price inflation.

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Friedman vs. Keynes

Anti-inflation theory originated in the Chicago School of Economics, authored by Milton Friedman, a conservative economist. It was Friedman's alternative to the Keynesian monetary model that was widely used during the Franklin Roosevelt Administration. Keynesians emphasise demand-production, i.e., full employment policies with assurances that working people have money to stimulate consumption. Friedman's focus was on preventing money from losing purchasing power.

Policy Goes Global

With the global integration of the economy, monetary policy in the United States has come to exert a powerful influence over the rest of the world. Anti-inflation policy in the United States is carried out by the Federal Reserve Chairman, an unelected official who runs the U.S. central bank. This policy affects the value of the U.S. dollar, which is the dominant international currency.

Criticisms

Anti-inflation policy is very controversial. Supporters point out that it prevents the loss of currency value, holding prices down. Critics point out that the goal of anti-inflation policy is to increase unemployment, and that as long as wage increases meet inflation, it has a minimal impact on working people. The critics claim that since the rich have most of the money, anti-inflation policy is designed to protect the value of their investments at the expense of working people whose wages stagnate or fall during periods of higher unemployment.

Impasse

Anti-inflation policy is based on a recursive relationship between interest rates and growth/stagnation. During the 1970s and the late 2000s, anti-inflation policy ran into a dilemma with its "interest-rate weapon." Unemployment continues to rise, even as the general economy stagnates. The interest rates were dropped to nearly zero, with little visible effect on the stagnation. The model fails in this instance, because there is no place left to go, i.e., interest rates cannot be lowered below zero.

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