Jul 08, 2009
‘Rigid' application of inflation targeting a ‘costly mistake', Stiglitz aversBack
Pretoria|South African Reserve Bank|Africa|Columbia|South Africa|United States|Great Hall|Joseph Stiglitz|Pravin Gordhan|Tito Mboweni
© 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
Other Video News
Updated 30 minutes ago The City of Johannesburg has launched its Environmental Management Inspectorate – a network of environmental enforcement officials – as part of the implementation of a memorandum of agreement between the city and the Gauteng Department of Agriculture and Rural...
Updated 1 hour 10 minutes ago Renewables developer and independent power producer BioTherm Energy’s Aries and Konkoonsies solar photovoltaic (PV) energy facilities, in the Northern Cape, have reached commercial operation, delivering a combined 20 MW of electricity to the national grid. The...
Updated 1 hour 23 minutes ago There is a “realistic opportunity” to double Opel sales in South Africa in the short term, says General Motors South Africa (GMSA) operations VP Ian Nicholls. GMSA will sell around 2 915 Opels in South Africa in 2013.
Recent Research Reports
Defence 2013: A review of South Africa's defence industry (PDF Report)
Creamer Media’s 2013 Defence Report examines South Africa’s defence industry, with particular focus on the key players in the sector, the innovations that have come out of the defence sector, local and export demand, South Africa’s controversial...
Road and Rail 2013: A review of South Africa's road and rail infrastructure (PDF Report)
Creamer Media’s Road and Rail 2013 Report examines South Africa’s road and rail transport system, with particular focus on the size and state of the country’s road and rail network, the funding and maintenance of these respective networks, and the push to move...
Liquid Fuels 2013 (PDF Report)
Creamer Media’s 2013 Liquid Fuels report examines South Africa’s liquid fuels market, focusing on the business environment, oil and gas exploration, the country’s feedstock supplies, the development of South Africa’s biofuels industry, fuel pricing,...
Projects in Progress - Second Edition (PDF Report)
Creamer Media’s second Projects in Progress supplement considers some of the major project developments under way, including high-profile energy and transport projects, as well as a few of the lower-profile public and private developments. What remains apparent is...
Water 2013: A review of South Africa’s water sector (PDF Report)
Creamer Media’s Water 2013 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.
Canadian Mining Roundup for June 2013 (PDF Report)
The June 2013 roundup includes details of the development of TSX-V-listed Aldridge Minerals’ flagship Yenipazar polymetallic project, in Turkey; the Canadian Nuclear Safety Commission’s renewal of Cameco’s uranium mining licence pertaining to the Cigar Lake...
This Week's Magazine
Mitsubishi Motors South Africa (MMSA) has introduced a 4x2 derivative of its Pajero Sport sports-utility vehicle (SUV), which will give it access to a substantial slice of the full-size SUV market, where it will compete with the likes of the Ford Everest, Chevrolet...
South African Energy Minister Ben Martins has affirmed that the government wants the country to be globally competitive in the nuclear sector. "Our responsibility has always been ... to ensure that, in nuclear energy, South Africa can compete with the rest of the...
Mercedes-Benz South Africa (MBSA) president and CEO Dr Martin Zimmermann describes the new S-Class as “a special place to be”, with the car creating a sense of “wellness” once you are seated inside the German brand’s flagship model. It is difficult to argue...
Water scarcity and water-quality issues are broadly recognised and understood in most political, business and civil organisations in South Africa, but solving water issues will require wide and continuous action in catchments and municipalities by organisations and...
Work is well under way on the R212-million Imvutshane dam, 30 km north-west of Stanger, in KwaZulu-Natal, which is a key link in supplying people in rural Maphumulo with a reliable source of safe drinking water.