Home > Uncategorized > Should central banks target stable prices or stable incomes?

Should central banks target stable prices or stable incomes?

On Voxeu Arvind Subramanian, India’s chief economic advisor, argues that: “for monetary transmission to work, both consumer prices and producer prices are relevant, but for different sets of agents.” while consumer prices show, in India, a much higher increase than producer prices.”. Which means that the central bank should not just look at consumer price inflation but also at producer price inflation. In the June issue of The Journal of Economic Issues I stress a similar point in “Metrics Meta About a Meta Metric: The Consumer Price Level as a Flawed Target for Central Bank Policy”, though going one step further (fifty free downloads here). From the abstract:

Inflation targeting is currently the policy of choice for central banks. This policy invariably targets consumer price inflation, which is only one of many available price level indices (such as prices of new investments and house prices). As there is no stable relationship between these price levels, and as differences in developments between the different price levels might induce destabilizing behavior, there is no reason why “low and stable” consumer price inflation should guarantee monetary and financial stability. Following John Maynard Keynes, a “low and stable” increase of average nominal wages might do a better job. As price levels are designed to estimate the purchasing power of spending power and as income, and spending power are used to not just consume or invest but also to pay down many kinds of (gross) debt, it is advisable to use a joint definition of monetary and financial stability, which combines stable purchasing power of monetary income with a stable ability of households and companies to pay off debts.

  1. June 26, 2015 at 9:18 pm

    Excellent point. He, like many economists now, is a nascent social crediter.

    PS: Can someone please get me the hell off moderation. As the above and other recent thinking on this blog shows an awakening to the social credit insight and I have been its most steadfast advocate here…..it might be the correct thing to do.

  2. June 26, 2015 at 11:28 pm

    Obviously stable wages would be a better benchmark (which is probably the point of the posting). Prices for consumer goods typically have a monotonic supply curve, so the damage done by believing neoclassical economics on this is relatively less. Wages have a V-Shaped supply curve – people offer more labor to the market under conditions of both greed and fear- and so neoclassical does massive damage with it’s naive approach in this area.

    Shockingly to this day I am not hearing any big name pointing out this common sense issue with supply and demand models.

  3. Wallace Klinck
    June 27, 2015 at 8:38 am

    Under a Social Credit dispensation consumer prices would be adjusted by the national production/consumption ratio and would normally always be falling. Ideal or target price would be zero inasmuch as this would signify absolute abundance achieved through the efficiency of non-labour factors of production. We are steadily moving in this direction but the financial system does not reflect this fundamental ratio. The consumer is properly charged with capital depreciation but wrongly not credited with capital depreciation.

    The concept of “stable prices” is simply a perverse assertion that the consumer should not benefit from greater efficiency and productivity in the form of reduced prices. Because consumer incomes would always be supplemented by increasing National Dividends and Compensated (falling) Retail Prices, demands for increased wages would be largely eliminated and the financial costs of production would be reduced commensurately. Increases in wages would be recognized for what they are–increased costs which result in higher prices as businesses attempt, as they must, to recover costs from sales. In the end the consumer must defray all costs of production. People would be better off to concentrate on increasing their effective incomes through the National Dividend and Compensated Prices. This would stimulate the development of technological efficiency as people sought a source of income independent of paid labour.

    In a Social Credit economy there would be no overall, macro-economic, need for consumer debt and no bank debts requiring liquidation. Monetary policy should not be to achieve stable prices nor to provide adequate income for consumers to pay off debt which should never be necessary in the first instance.

    It seems to take a long time to slough off the effects of decades and even centuries of mental habits and misperceptions which are more the product of brainwashing than of reference to the actual facts of production and consumption.

  4. Wallace Klinck
    June 27, 2015 at 8:55 am


    The last line of the first paragraph in my post above should have read: “The consumer is properly charged with capital depreciation but wrongly not credited with capital appreciation.”

    My apology.

  5. June 27, 2015 at 4:09 pm

    Reblogged this on Forwardeconomics.

  6. Macrocompassion
    June 27, 2015 at 8:27 pm

    Supply and satisfied-demand must be equal (and opposite). Consumer price and Product price (presumably total cost at goods outlet) must be the same and vary in the same way. Would somebody please explain here what is actually the difference between these two expressions?

  7. macroambiente
    June 27, 2015 at 9:21 pm

    Central banks are private institutions that have the legal power to command the economy, and we must realistically expect that they do that for the sake of their stockholders. They disguise their intentions with good names as “financial stability program” and “inflation control mission” but they are incapable of providing promised results for they cannot avoid the explosive trend of the public debt they created and therefrom the explosive money emission (Public Debt Is Economic Nonsense, http://itnifa2015.weaconferences.net/papers/public-debt-is-economic-nonsense). So, no matter the price index they adopt; they will always control it in their models but never in the real world.
    Moreover, in “Supply and Demand is Not a Neoclassical Concern” (http://mpra.ub.uni-muenchen.de/63135/), it is shown an estimate of the US price index as part of the estimate of the US aggregate supply curve. It is there stressed the evidence that fiscal policy is more important than the monetary policy in the price determination. Respective elasticities (1962-2007 average; not informed there) are 0.256 to the former and 0.129 to the latter (p. 18). It seems that what commands the aggregate demand and consequently GDP, price index and the economy as a whole is the fiscal policy; monetary policy shows little influence in the real world. Actually, the GDP estimate generates elasticities 0.944 to the fiscal policy and 0.0055 to the monetary policy (also p. 18). So, it is expected that central banks have little influence over people’s income and are thus unable to target it directly; they impact people’s income imposing primary surpluses to force governments to raise tax and cut social expenses to pay their accrued interests cash or, preferably, giving up public assets.

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