Tighter Monetary Policy Needed to Curb Commodity Inflation
With commodity prices soaring but overall inflation staying relatively low, the IMF has released a new working paper entitled, “Recent Inflationary Trends in World Commodity Markets.”
The paper does not represent the official IMF view. Nonetheless, it presents a dire view of current policy conundrums that governments the world over are facing.
Policy makers may have to face a policy dilemma: maintain monetary policy stance with accelerating commodities price inflation, subsequent world recession, and financial disorder; or tighten monetary policy with subsequent world recession followed by recovery and financial and price stability.
At the center of the problem has been an increase in commodity prices of 23% per annum during the 2003-2007 period. The paper argues that that increase was the “delayed effect of an overly expansionary monetary policy which led to a fast expansion of all types of credits, irrespective of creditworthiness, and to a worldwide strong expansion of demand for real assets, goods, and services.”
“In order to rein in inflation and bring back a measure of stability in commodities and financial markets,” the paper insists, “monetary policy has to be tightened considerably and be directed to strictly controlling credit and money supply.”
In the end, the paper recommends a course similar to that which the Carter administration and other governments pursued in the late 1970s: “If the course of monetary policy is to be corrected, through controlling money supply, interest rates will go up sharply, exchange rates will appreciate, a debt crisis may erupt, and a temporary recession may set in as was the experience in 1979-82. The merit of prudent monetary policy would be to bring back price stability and durable economic growth, as illustrated by episodes during 1980–99.“
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.