Can a monetary policy based on price stability be a worldwide solution to unemployment and inflation?
Can a monetary policy based on price stability be a worldwide solution to unemployment and inflation?
Economics over the years has evolved into a complex mechanism where people look at to solve most of its problems. Just a hundred years ago, different countries debated their ideals about which economic model would bring economic prosperity not only for their citizenry, but how their ideals could serve as a model for the rest of the world. Today, we see a different world, a world that observed the failure of different economic models and now strives to foster stability by using economic instruments like the manipulation of interest rates, targeting inflation and fostering price stability as a recipe for boosting their economies.
In a effort to answer the question about if a monetary policy based on price stability could be a worldwide solution to unemployment and inflation, I have taken data from the central banks from different countries and compare them to see what is changing in those economies. Bellow are some charts comparing some Industrialized countries and their respective monetary policies.
| Countries | GDP(PPP) $millions | Inflation Rate | Share of world GDP | Monetary Policies | |
| European | $ 13,881,051 | 1.9 | % | 14.6% | Price stability targeting unemployment |
| | $ 2,121,766 | 3.54 | % | Not considered | Monetary stability to promote |
| | $ 4,170,533 | 0.3 | % | 6.3% | Solely focused on price stabilty |
| | $ 13,020,861 | 2.76 | % | 19.7% | Price stability by the use of the |
As we can see, these three countries have similar monetary policies; thus, their GDP are substantial as well as their Inflation rate are relatively low. Some countries like the E.U. have a lower inflation rate since their target inflation in a more efficient manner. In the charts we can see the
In addition to it, there is no doubt that the two major economies are the
It seems overall these industrialized countries are doing pretty good with their monetary policies in place. But, what can we say about unemployment behavior rates in those countries? The data was taken from Earthtrends (1)
Income Distribution (years vary)
Gini coefficient (0=perfect equality;
100=perfect inequality) 25%
Percent of total income earned by the richest
20% of the population: 35.7%
Percent of total income earned by the poorest
20% of the population: 10.6%
National Poverty Rate: X
Poverty Rate, Urban Population: X
Percent of population living on less than $1 a day X
Percent of population living on less than $2 a day X
US
Poverty rate 12.3%
Income Distribution (years vary)
Gini coefficient (0=perfect equality;
100=perfect inequality) 37%
Percent of total income earned by the richest
20% of the population: 43.2%
Percent of total income earned by the poorest
20% of the population: 6.1%
National Poverty Rate: X
Poverty Rate, Urban Population: X
Percent of population living on less than $1 a day X
Percent of population living on less than $2 a day X
US
Income Distribution (years vary)
Gini coefficient (0=perfect equality;
100=perfect inequality) 41%
Percent of total income earned by the richest
20% of the population: 46.4%
Percent of total income earned by the poorest
20% of the population: 5.2%
National Poverty Rate: X
Poverty Rate, Urban Population: X
Percent of population living on less than $1 a day X
Percent of population living on less than $2 a day X
| | HPI-2 (%) | Poverty (%) | Short life (%) | Illiteracy (%) | Long-term unemployment (%) |
| | 7.6 | 8.7 | 8.5 | 7.5 | 2.7 |
| | 8.2 | 6.2 | 9.2 | 10.5 | 1.9 |
| | 8.6 | 3.9 | 11.1 | 10.4 | 3.1 |
| | 9.3 | 6.9 | 12.7 | 9.6 | 1.5 |
| | 10.4 | 5.9 | 10.5 | 14.4 | 4.9 |
| | 10.5 | 4.1 | 10.4 | n.a. | 0.9 |
| | 11.1 | 8.4 | 11.1 | n.a. | 5.2 |
| | 11.6 | 9.1 | 9.9 | n.a. | 10.2 |
| | 11.9 | 12.8 | 8.9. | n.a. | 8.1 |
| | 12.4 | 5.5 | 9.9 | 18.4 | 5.5 |
| | 14.6 | 10.6 | 9.6 | 21.8 | 2.1 |
| | 15.0 | 9.4 | 9.8 | 22.6 | 4.4 |
In this graph we can observe a EU with significant poverty rates with the
| Income Distribution (years vary) | | | US | | |
| Gini coefficient (0=perfect equality; | | | | | |
| 100=perfect inequality) | | | 37% | 41% | 25% |
| Percent of total income earned by the richest | | | | ||
| 20% of the population: | | | 43.20% | 46.4% | 35.7% |
| Percent of total income earned by the poorest | | | | ||
| 20% of the population: | | | 6.10% | 5.2% | 10.6% |
| National Poverty Rate: | | | X | X | X |
| Poverty Rate, Urban Population: | | | X | X | X |
| Percent of population living on less than $1 a day | X | X | X | ||
| Percent of population living on less than $2 a day | X | X | X | ||
In the comparison chart we can see that even though the
From the data above we can observe that a monetary policy focused on price stability and targeting inflation at a rate approximate to 2% can significantly reduce inflation, or keep it within desired ranges like a beast in a cage. However, unemployment rates and income distribution gaps are resistant to reduction because such rates are affected by different variables. In a different analysis I will take into consideration variables such GDP(PPP), Unemployment rates, and Inflation in order to see if there is a relationship between the type of monetary policy and the overall improvement of these variables.
| Countries using Price Stability and | GDP(PPP) | Inflation | Unemployment | Price Stability (1) Focus more on Inflationary targets (0) |
| European | $ 13,881,051 | 1.90% | 7.90% | 0 |
| | $ 4,170,533 | 0.30% | 4.10% | 0 |
| | $ 13,020,861 | 2.76% | 4.60% | 1 |
| | $ 1,149,000 | 3.40% | 3.20% | 0 |
| | $ 77,090 | 8.20% | 16.00% | 0 |
| | $ 27,551 | 2.60% | 8.80% | 0 |
| | $ 170,089 | 3.10% | 7.20% | 0 |
| | $ 209,852 | 2.60% | 7.40% | 0 |
| | $ 671,508 | 9.80% | 8.70% | 0 |
| | $ 176,400 | 15.80% | 8.90% | 0 |
| | $ 718,400 | 3.80% | 4.30% | 0 |
| | $ 43,196 | 2.40% | 30.00% | 0 |
| | $ 17,270 | 12.00% | 5.90% | 0 |
From the data shown above we can say the following about GDP (PPP) and monetary policy:
Linearity: The residual plot indicates a violation of equal variation.
Normality: The values are normally distributed since the assumption about normality at the 0.2000 level of significance confirms non-normal distribution values. Also, there are some points outside the band on the expected normal plot.
Standard error of estimate (S y/x): if the estimated line is used; there is a typical error of $3,984,370 when predicting the GDP (PPP) in this sample.
R-Squared: 40.06% of the sample variability of the GDP (PPP) that can be associated with variations in the type of monetary policy applied.
-11,244,866 ± [(2.262)*(4147063.1847)]
-11,244,866 ± 9,380,657
We can say with 95% confidence that a change in the type of monetary policy is associated with a decrease of $11,244,866 in the average value of the GDP (PPP) with margin of error of ± 9,380,657.
Ho: b1 = 0
H1: b1 > 0
Reject Ho if t>2.262; t-stat= 2.712
We can say with 95% confidence that a change in monetary policy is associated with changes in the average GDP (PPP).
These results make sense, since the way a monetary policy is design will have a direct effect in the way the economy will behave.
From the data shown above we can say the following about inflation rates and monetary policy:
Linearity: The residual plot indicates a violation of equal variation.
Normality: The values appear to be normal.
Standard error of estimate (S y/x): if the estimated line is used; there is a typical error of 4.80 when predicting the inflation rates in this sample.
R-Squared: 2.64% of the sample variability of the inflation rates that can be associated with variations in the type of monetary policy applied.
0.0549 ± [(2.262)*(0.05)]
0.0549 ± 0.1131
We can say with 95% confidence that a change in the type of monetary policy is associated with a decrease of 0.0549 in the average value of the inflation rates with margin of error of ± 0.1131
Ho: b1 = 0
H1: b1 ≠ 0
Reject Ho if -2.262>t>2.262; t-stat= -0.547
We do not have sufficient evidence to conclude that changes in monetary policy are associated with changes in the average inflation rates.
These results make sense, since the analysis is just a scratch in the surface. In order to see if there is or not a relationship we must examine other variables as government spending, trade influence, and other variables according to each country.
From the data shown above we can say the following about unemployment rates and monetary policy:
Linearity: The residual plot indicates a violation of equal variation.
Normality: The values are normally distributed since the assumption about normality at the 0.2000 level of significance confirms non-normal distribution values. Also, there are some points outside the band on the expected normal plot.
Standard error of estimate (S y/x): if the estimated line is used; there is a typical error of 0.07 when predicting the inflation rates in this sample.
R-Squared: 3.46% of the sample variability of the inflation rates that can be associated with variations in the type of monetary policy applied.
0.0937 ± [(-0.0477)*(0.0759)]
0.0937 ± -0.004
We can say with 95% confidence that a change in the type of monetary policy is associated with a decrease of 0.0937 in the average value of the inflation rates with margin of error of ± -0.004
Ho: b1 = 0
H1: b1 ≠ 0
Reject Ho if -2.262>t>2.262; t-stat= -0.628
We do not have sufficient evidence to conclude that changes in monetary policy are associated with changes in the average unemployment rates.
These results make sense, since the analysis is just a scratch in the surface. In order to see if there is or not a relationship we must examine other variables as government spending, interest rate fluctuation, inflation, foreign investment, political stability, and other variables according to each country.
The analysis performed with these three variables: GDP (PPP), Unemployment, and inflation rates, reveals that a monetary policy is not more than an ingredient to the economic success of a country. However by the results of the data, it seems it is an important ingredient. The real success it is like an exquisite entrée, we can see and taste such a delicacy which in fact we give our critique. Oh! So exquisite –we say— or maybe we dislike it. However, only the chef is worried about the right combination of ingredients, amount of water, etc. I think the same is for economics. We look at the overall economy hungry for prosperity, but only in the kitchen is where the meal is cooking. There is no such a thing as an economic vaccine for hyperinflation and poverty. It is a combination of things that must come from the realities of the countries where the economic models are applied. Some of the countries like the
Author: DANILO AVALOS On the other hand, third world countries seem to have a slow growth regardless of its monetary policy in place. This problem is based on the political turmoil of many South American countries, and the preferences of it leaders for leftward shift.
In the Economic Letter, published by the Federal Reserve Bank of
There are no doubt such variables as careless government spending in social programs, imposing price controls, price controls, and the creation of a hostile environment for private investments can sink any emergent economy. Such is the case of
I think that we have always in Latin America had a pendular movement between those who would go for the market and those who will be against it –At least nominally so—and the reason for that, of course, it’s that whenever market reforms take place they don’t take into consideration the last two reforms of the Washington consensus. Which has 10 reforms, and the last two are for macroeconomic stability, stable currency, good property rights accessible for everybody, and entrepreneurial form of organization accessible for everybody. What we have seen in a recent study that we carried it out with the Interamerican Developing Bank is that literally about some 90% of
…The state employs only a small part of the population, and the reforms do not get to the poor. So they tend to vote for some groups or support groups who are left oriented. It is not that people doesn’t like the market. If you walk to the street you will see people making deals. It is just very hard to implement legal reforms… The future for
I don’t think it is necessary to add more to the explanation since the problem was exposed clearly by
Words Cited
1: <http://earthtrends.wri.org>
2: Micklewright, John and Stewart, Kitty. Poverty and Social Exclusion in
3: Gruben, William and Alm. Richard. Economic Letter. Insights from the Federal Rserve Bank of Dallas.Vol.2, No.7. July 2007
4:
Labels: GDP, inflation, monetary policy
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