Wednesday, September 16, 2015

Misunderstanding inflation in the WSJ

Mark Thoma links us to this at the WSJ:
If consumers believe that inflation will remain high, they tend to save and not buy goods and services, thus tempering demand in the economy.
What?

The cause of inflation (at least in mainstream economics) is that consumers want too many currently produced goods and services because they don't want to hold as much cash (e.g. because its value is decreasing because of loose money).

The behavior described in the WSJ is a potential mechanism to bring inflation down (i.e. a drop in AD)!


See also Nick Rowe on why economists think inflation could be bad (emphasis on the could):
Economists would instead talk about shoeleather costs, menu costs, relative price distortions, difficulties of indexing taxes, confused accountants, etc.
In the ITM, if you have high inflation, you're in luck: the quantity theory of money is a good approximation, monetary policy is effective and you can use it to control inflation!

4 comments:

  1. "What?"... Lol, no kidding! What's going on over there?

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  2. I can only suppose that Rajan, who surely knows about the Germans buying stuff as fast as they could during the Weimar hyperinflation, is describing the actions of Indian consumers and making a guess about their psychology.

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    Replies
    1. I think the error was on the part of the journalist writing the article (hence I blamed the WSJ, not Rajan). Rajan only quoted to be saying things about anchored inflation expectations -- standard econ.

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    2. Looking at the article again when I took a break, I now think that the quoted material is not from Rajan, but from the WSJ. {sigh}

      Delete

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Also, try to avoid the use of dollar signs as they interfere with my setup of mathjax. I left it set up that way because I think this is funny for an economics blog. You can use € or £ instead.