Inflation is a monetary phenomenon controlled by the Central Banks

Ámbito Financiero – The Central Banks should be independent of the policy and apply this new recipe. The result was the disappearance of high inflation in almost every country in the world. In Argentina, the idea of ​​having an independent and serious Central Bank has not worked.

A few days ago it was confirmed that during 2019 Argentina had the third highest inflation on the planet behind Venezuela and Zimbabwe. However, there are still politicians and economists who continue to deny that inflation has a monetary origin. This is almost the same as denying the law of gravity or claiming that the earth is flat. In the rest of the world, nobody disputes that central banks are solely responsible for price stability, and set strict inflation targets. There are hardly any signs that the price index can increase more than 2% per year, restrictive monetary policies are applied to keep inflation under control. Germany was one of the first to learn the value of a strong currency, after suffering the rigors of the great hyperinflation in the twenties. The Bundesbank became one of the most serious central banks in the world with total independence from the political class, and its organic charter states that the sole objective of its monetary policy is to maintain price stability.

On the other hand, other central banks in Europe, like the US Federal Reserve, have a double objective of monetary policy: to keep inflation under control and at the same time avoid the increase in the unemployment rate. During the 70s, with the rise of Keynesian ideas, many countries reached double-digit inflation rates, exceeding 20% ​​annually in England, Italy and Spain, somewhat less in France; in India it reached a peak of 30%; other countries such as Turkey or some Latin American countries exceeded 100% annually; but even the US or Sweden reached 14% annually towards the end of that decade. Many blamed the rise in oil prices caused by the OPEC cartel. Undoubtedly, this price increase had a short-term effect throughout the world until relative prices were accommodated. However, Germany, despite being an importer of oil, only had an 8% annual peak that was quickly controlled. Three years later it returned to 2% annually.

Meanwhile the academy started changing its vision of monetary policy since Milton Friedman’s speech, in December 1967, at the American Economic Association, where he founded that monetary policy does not produce long-term effects on economic growth. In addition to the works of Edmund Phelps, John Muth, Robert Lucas, Robert Barro, David Gordon, Thomas Sargent, Robert Hall, Guillermo Calvo and others, the academy was adopting the idea, not controversial, that there is a natural unemployment rate that does not accelerate inflation (“non-accelerating inflation rate of unemployment” or NAIRU).

Almost simultaneously, virtually every central bank in the world ended its inflationary policies. It was widely accepted that there were two forces that drove inflation: money market narrowness and expected inflation, incorporating a Phillips curve increased by expectations in the general equilibrium models used by central banks. The Central Banks should be independent of the policy and apply this new recipe. The result was the disappearance of high inflation in almost every country in the world.

To mention two examples, Paul Volcker assumed in the Fed in 1979 and in three years inflation fell from 14% to 4% annually. Later, the Europeans adopted the Euro as a common currency, and created the independent European Central Bank, whose organic charter states that “The main objective of the ECB’s monetary policy is to maintain price stability. This is the best contribution monetary policy can make to economic growth and job creation. ” And inflation across Europe is now below 2% per year.

The Argentine case does not deny the world, but confirms the consequences of a mishandling of monetary policy. The Central Bank is not independent, but is directed by the Executive Power and replaces at will the presidents who according to the law should last more than a presidential term. The monetary issue during the four years of the Macri administration was 155% and inflation was 295%. Inflationary expectations are formed by looking forward. The BCRA had been issuing paid liabilities (Lebacs and then Leliqs), which was interpreted by the market as future issuance (and therefore higher expected inflation rate). To this was added the confirmation, on December 28, 2017 that the BCRA was not independent. Then there was the sudden stop of April-June 2018 and a new shock of negative expectations when winning Fernández las PASO in 2019. As a result, the fall in the demand for money accelerated, which explains the differential between the monetary issue and the inflation rate, beyond the natural lag of the monetary policy effect.

Inflation is an unlegislated tax that affects especially the poorest. We Argentines know that we can eliminate it with a convertibility law, or dollarization. The idea of having an independent and serious Central Bank has not worked. Maybe, just delete it