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January 16, 2007



Anybody following the high Money Expansion, the end of the carry trade, and the large banking profits and bonus will not be suprised by the inflation figures.


2.25% is not quite no different from 2.22%, which might sound like I'm being picky, but isn't this the magnitude of gain from low inflation that Robert Barro found in a study in the mid 1990s?


"2.25% is not quite no different from 2.22%": even in view of the likely measurement error?


Sure (although I suppose it's possible the Treasury's forecast of new growth rate is old growth rate + 0.03%, in which case it wouldn't matter), I'm just saying I remember a study in which gains that small were forecast. Looking it up its "Growth and inflation", by Barro, R, 1995, and the figures I can get from the synopsis are 10% inflation leads to 0.2% to 0.3% per year less growth.

Matthew Sinclair

Surely the conventional explanation would be that central bank independence has increased the credibility that inflation will be fought... classic Barro rational expectations stuff.

As to economic performance. Even if the growth gain is relatively minor inflation and instability have costs of their own. E.g. WW2 and other less melodromatic examples :)


It seems to me that, in an increasingly globalized world, excessive/insufficient demand is spilling over into trade deficits/surpluses rather than higher/lower inflation. Just ask the US and Germany.

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