Time to look on the supply side of life

Time to look on the supply side of life

The US Federal Reserve is re-evaluating inflation targeting as a method of supposedly keeping the global economy within predictable limits - and not before time

In February, the US Federal Reserve embarked on a review of its inflation-targeting framework. The discussion is timely and could set the stage for other central banks to do the same. The theory behind inflation targeting is pretty simple. Central banks set a publicly known inflation target which the central bank achieves by changing short-term interest rates (up or down). If inflation is too low, the central bank cuts interest rates and stimulates the economy, which is supposed to generate upward inflation pressures. Likewise, if inflation is too high the central bank can raise rates and reduce inflation pressures. Note, the focus here is on controlling demand. Inflation-targeting regimes do not address supply-side issues (more on this below).

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