The economist Milton Friedman once opined that inflation is always and everywhere a monetary phenomenon. That is, of course, a huge overstatement. As the world is now witnessing, many factors affect inflation, including government spending stimulus and global supply shocks.
For all their complaints about inflation, one wonders how prepared voters are for yet another deep recession. Monetary policy has a big effect on politics; the economic cycle is a strong predictor of elections almost everywhere in the world. But as the current crisis has made clear, politics also affects monetary policy.
It is true that central banks can bend long-term inflation rates to their will if they are patient enough and independent enough. But it is unclear how far they can go if the global economy continues to suffer seismic shocks.
The Prime Minister’s parting remarks to caucus last week to go home over the summer and think hard about cuts in spending will present a worrying but entirely predictable exercise for our Justice fiscal minders. In this long-read Professor Rogoff considers the pandemic price of stability in the USA.
KENNETH S. ROGOFF is Professor of Economics at Harvard University and a Senior Fellow at the Council on Foreign Relations. He was Chief Economist at the International Monetary Fund from 2001 to 2003.
