Jul 08, 2009
‘Rigid' application of inflation targeting a ‘costly mistake', Stiglitz aversBack
© Reuse this
He added that it had been a "costly mistake" for governments to have pursued the policy excessively, but he stressed that he could not comment directly on the application of the policy in South Africa.
Speaking ahead of a lecture, which he delivered in the Great Hall at the University of Witwatersrand on Wednesday, Stiglitz argued that many central banks had made the "mistake" of "acting as if low consumer-price inflation was necessary and almost sufficient for economic stability".
"I don't think anybody believes that anymore," he quipped, adding that it was a product of the poor application of economic theory.
The models employed by central bankers highlighted the distortions caused by relative price changes associated with moderate inflation.
But, Stiglitz, who was in South Africa for a meeting of the so-called Africa taskforce of the Initiative for Policy Dialogue, which would take place of in Pretoria on Thursday and Friday, argued that the losses in economic efficiency caused by the meltdown of the financial system were larger by an order of magnitude.
"So, they were focusing on something that was really a second, or third order of magnitude, when they should have been focusing on something that was really important," he averred.
Inflation could become a serious problem if left uncontrolled. But, the authorities had to be certain that the application for interest rates could actually affect prices, particularly in developing economies where much of the inflation was caused either by external or imported factors, or administered price increases.
It was, therefore, at times, "absurd" to place the full burden of containing such prices on interest rates. "In some cases bringing inflation down through the raising interest rates was akin to the "cure being worse than the disease", as wage inflation was brought under control at the expense of job losses.
The Columbia University professor's censure comes at a time when some economists, supported by South Africa's largest labour federation, the Congress of South African Trade Unions, were intensifying calls for the South African Reserve Bank (SARB) to be released from its single mandate of maintaining inflation within a target band of between 3% and 6%.
These calls were amplified recently, after governor Tito Mboweni put a halt to what had been a rapid loosening in monetary policy when he failed to lower rates after the June meeting of the Monetary Policy Committee (MPC). The repurchase rate was unexpectedly kept at 7,5%, with inflation slowing less than expected to 8% in May.
Prior to the latest MPC decision, the bank had cut its key rate by a material 450 basis points since December as its attention shifted to economic growth as South Africa slumped into its first recession in 17 years.
However, many inflation-wary economists have argued that the SARB had not been overly rigid in its application of inflation targeting, particularly as the current crises evolved. They have noted, for instance, that the bank had continued cutting rates despite the fact that inflation had remained stubbornly out of range and above expectations.
Further, inflation-targeting advocates have stressed that the policy had been pursued locally in the context of continued financial stability, supported by sound financial-market regulation, the absence of which was the true cause of the meltdown.
Finance Minister Pravin Gordhan said last week that South Africa would keep its policy of targeting inflation, which had helped to stabilise prices and encouraged economic growth.
Stiglitz agreed that poor regulation had been at the main cause of the collapse in the US banking system, which led to the global financial crisis.
He added that most governments had already moved to more flexible inflation targeting systems. "It has become just one of the list of things that monetary policy has to look at. And, that's the way I think it ought to be."
Edited by: Creamer Media Reporter© Reuse this Comment Guidelines (150 word limit)
Other Economy News
Updated 5 hours ago President Jacob Zuma has appointed South African Reserve Bank (SARB) adviser and Monetary Policy Committee member Kuben Naidoo as SARB deputy governor, following the promotion of former incumbent Lesetja Kganyago to SARB governor in November. Naidoo, who will take up...
Updated 6 hours ago The agricultural sector has a key role to play in a green economy, which incorporates both an environmental and social dimension, notes Council for Scientific and Industrial Research (CSIR) senior researcher and/or leader of the Agricultural Green Economy Project Dr...
Updated 7 hours ago A challenging construction sector, difficult contractual environment and poor operational performance have contributed to JSE-listed construction company Basil Read reporting an R820.9-million aftertax loss for the year ended December 31, 2014. “Lossmaking contracts...
Updated 45 minutes ago The government of St Helena (SHG) and its Department for International Development (DFID) on Friday appointed airline Comair as the provider of air services to St Helena with the Island’s first airport opening in 2016. Comair would offer a weekly Saturday service,...
Updated 1 hour 15 minutes ago The Department of Communications (DoC) digital terrestrial television (DTT) project team was accelerating its efforts to “revive” South Africa’s long anticipated transition from analogue to digital broadcasting. After a more than six-year delay, the next few weeks...
Updated 1 hour 16 minutes ago Residential property prices are forecast to grow at 7.2% this year, on the back of 6.72% growth in 2014.
Recent Research Reports
Projects in Progress 2015 - First Edition (PDF Report)
In fact, this edition of Creamer Media’s Projects in Progress 2015 supplement tracks developments taking place under the Renewable Energy Independent Power Producer Procurement Programme, which has had four bidding rounds. It appears to remain a shining light on the...
Electricity 2015: A review of South Africa's electricity sector (PDF Report)
Creamer Media’s Electricity 2015 report provides an overview of State-owned power utility Eskom and independent power producers, as well as electricity planning, transmission, distribution and the theft thereof, besides other issues.
Construction 2015: A review of South Africa’s construction sector (PDF Report)
Creamer Media’s Construction 2015 Report examines South Africa’s construction industry over the past 12 months. The report provides insight into the business environment; the key participants in the sector; local construction demand; geographic diversification;...
Liquid Fuels 2014 - A review of South Africa's Liquid Fuels sector (PDF Report)
Creamer Media’s Liquid Fuels 2014 Report examines these issues, focusing on the business environment, oil and gas exploration, the country’s feedstock supplies, the development of South Africa’s biofuels industry, fuel pricing, competition in the sector, the...
Water 2014: A review of South Africa's water sector (PDF Report)
Creamer Media’s Water 2014 report considers the aforementioned issues, not only in the South African context, but also in the African and global context, and examines the issues of water and sanitation, water quality and the demand for water, among others.
Defence 2014: A review of South Africa's defence industry (PDF Report)
Creamer Media’s Defence 2014 report examines South Africa’s defence industry, with particular focus on the key participants in the sector, the innovations that have come out of the sector, local and export demand, South Africa’s controversial multibillion-rand...
This Week's Magazine
Projected capital expenditure (capex) in the South African automotive assembly industry should reach a record R7.48-billion this year, says the National Association of Automobile Manufacturers of South Africa (Naamsa) in its 2014 fourth quarter business review. Capex...
After several years of navigating project-threatening red tape and currency fluctuations, the 4.4 MW Bronkhorstspruit biogas power plant, which will supply clean energy to a leading automotive manufacturer in Gauteng, is expected to enter production before June....
South African paper and pulp producer Sappi reported earlier this month that it would build a pilot plant for the production of low-cost Cellulose NanoFibrils, or CNF (nanocellulose) at the Brightlands Chemelot Campus in Sittard-Geleen in the Netherlands.
The long-term outlook for Nigeria is a country that has the potential to be very strong. So affirmed International Monetary Fund (IMF) Nigeria Mission Chief and Senior Resident Representative Dr Gene Leon on recently. "But we are starting from a point of huge...
Poor infrastructure planning and inadequate maintenance are becoming increasingly problematic for new developments and the associated infrastructure required to support such developments. In many urban and rural municipalities, the state of infrastructure has been...