The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
- BLS Handbook of Methods
- Bureau of Economic Analysis
- Bureau of Labor Statistics
- Congressional Budget Office
- Economic Data - FRED® II, St. Louis Fed
- Office of Management and Budget
- Statistics: Releases and Historical Data, Board of Governors
- U.S. Census Bureau Economic Programs
- White House Economic Statistics Briefing Room
July 26, 2007
Why Central Bankers Worry About Fiscal Policy
Today I again hand the keys to Mike Bryan -- now a fellow adjunct faculty member in the University of Chicago's Graduate School of Business -- who provides us with a contemporary example of why it behooves central bankers to speak out when a nation's fiscal situtation gets out of whack:
The reports from Zimbabweover the past year and a half are the stuff that makes for good Money and Banking lectures. It seems that inflation in that country, as officially reported, topped 1,300 percent last year and may now exceed 3,700 percent, with some unofficial reports putting the country’s inflation rate even higher. Let’s put this inflation in perspective. If the last reported inflation number can be believed (the country’s Central Statistical Office recently stopped reporting the inflation numbers as it reviews its methodology), prices in Zimbabwe are doubling every month. Inflation of this magnitude renders the government-issued money virtually worthless, wrecking trade and financial institutions in the process.
While the rate of inflation in the African nation isn’t known for certain, there is little doubt it is extraordinarily high. Also not in doubt is its cause. All inflations originate from the same phenomenon—too much money chasing too few goods. In this case the Reserve Bank of Zimbabwe is rapidly printing Zimbabwe dollars in order to “pay” for a large fiscal shortfall.
In a recent IMF paper on the Zimbabwe situation the author argues that the Reserve Bank of Zimbabwe’s (RBZ) inflation problems stem not from the usual monetary or fiscal laxness that has triggered other “hyperinflations,” but rather “quasi-fiscal” losses incurred by the central bank itself. Still, the report concludes that these losses, which stem from some combination of credit subsidies, realized and unrealized exchange losses, and losses from open market operations, were nevertheless incurred to support government policies, and the failure to address these losses has interfered with the monetary management, independence, and credibility of the RBZ.
The immediate “solution” to the Zimbabwe inflation has been the imposition of price controls, an approach that has been attempted by governments ancient and modern, including our own. I can think of no better source on this topic than economist Hugh Rockoff of Rutgers. Zimbabwe’s controls are actually retroactive, in the sense that merchants have been asked to reduce prices to earlier levels. Predictably, the problem seems to have gotten worse—now there are even fewer goods for the Zimbabwe dollar to chase. When and where will the Zimbabweinflation end? I certainly don’t know. But I’ve got a pretty good idea how it will end, by a sharp curtailment of their currency expansion. And that’s the Money and Banking lesson. If a central bank wants to end inflation, either they better start producing goods, or stop producing money.
And that, I would add, will be a hard row to hoe unless the fiscal house is put in order.
TrackBack URL for this entry:
Listed below are links to blogs that reference Why Central Bankers Worry About Fiscal Policy :
- More Ways to Watch Wages
- Unemployment versus Underemployment: Assessing Labor Market Slack
- Does a High-Pressure Labor Market Bring Long-Term Benefits?
- Net Exports Continue to Bedevil GDPNow
- Examining Changes in Labor Force Participation
- Wage Growth Tracker: Every Which Way (and Up)
- Following the Overseas Money
- The Impact of Extraordinary Policy on Interest and Foreign Exchange Rates
- Using Judgment in Forecasting: Does It Matter?
- Does Lower Pay Mean Smaller Raises?
- February 2017
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- August 2016
- July 2016
- June 2016
- May 2016
- Business Cycles
- Business Inflation Expectations
- Capital and Investment
- Capital Markets
- Data Releases
- Economic conditions
- Economic Growth and Development
- Exchange Rates and the Dollar
- Fed Funds Futures
- Federal Debt and Deficits
- Federal Reserve and Monetary Policy
- Financial System
- Fiscal Policy
- Health Care
- Inflation Expectations
- Interest Rates
- Labor Markets
- Latin America/South America
- Monetary Policy
- Money Markets
- Real Estate
- Saving, Capital, and Investment
- Small Business
- Social Security
- This, That, and the Other
- Trade Deficit
- Wage Growth