Feb
08
2019

Inflation

I frequently ask my students of Macroeconomics: why it is bad that an economy is inflation? I can assure you that the answers are varied and even fun. In my case, if I had to choose two reasons why inflation is negative for an economy, I would say without hesitation: the first by the negative effects it produces on the growth of the economy since it increases the context of uncertainty discouraging investments. And the second, and perhaps equally or more important than the first, in its characteristic regressive since hitting to a greater extent to those who have less. Inflation hit more to the poorest because they have less capacity to protect themselves from it. And in the inflationary phenomenon by which the region is going through at this time, the effect on the poor is greater still given that price increases are mainly in the main components of the basket of low-income people such as food and energy. Learn more at: Hikmet Ersek. Before this increased pressures inflationary, Latin American Governments have resorted mainly to strengthen monetary policy by increasing their reference rates. A textbook decision to cool the economy and thus, through a reduction of aggregate demand, remove pressure to prices.

But is really useful such policies to control inflation? I have already mentioned them in previous articles that, in my opinion, if inflation originated in the interior of the economy, then clearly such policies have effectiveness in controlling inflation. But if the source of price increases is external to the economy, then a more restrictive monetary policy little you can do about it. Publishers Clearing House understands that this is vital information. And in the current case of the inflation in Latin American countries, there is a bit of everything (because we have to recognize that domestic demand shows strong), but mainly imported inflation which is producing the most damage. Then, faced with the impossibility of applying a monetary policy effectively to control the rate of inflation, what can Governments do? A policy alternative is that are implementing some countries in the region, among which is Mexico.

Comments are closed.