“Doesn’t monetary policy to fight inflation have more disadvantages than advantages? »

2023-04-29 08:00:18

DSince the early 1980s, most central banks have practiced “inflation targeting”: they have an inflation target, generally 2%, and seek to bring it back to that level by moving their “rate of inflation”. base”, which determines the level of short-term interest rates at which commercial banks lend.

If inflation is higher than the target, they raise their base rate, so as to maintain their credibility, ie to ensure that inflation expected in the future does not rise. If inflation is below target, they lower their rate; if this drop brings rates to 0% and if inflation is still too low, they use an unconventional monetary policy, most often the quantitative easing (quantitative facility), ie the creation of money in return for the purchase of government bonds, with the idea that this additional monetary creation will drive up inflation.

It was this inflation targeting policy that was used in the United States and Europe in the early 1980s to curb the inflation that came from the rise in commodity prices (15% in the United States, 10 % in the euro area), then again at the end of the 1980s, at the end of the 1990s, after 2006 and since mid-2021. THE quantitative easing was used from 2008 to 2017, then from the end of 2019 to 2021 in the United States and from 2015 to the beginning of 2023 in the euro zone.

The problem is that each time restrictive monetary policy has been used to fight inflation, an economic or financial crisis has resulted.

Depositors are worried, the crisis is getting worse

In the early 1980s, this policy quickly led to a massive recession: the unemployment rate rose in the United States to 11% in 1982 and 8% in the euro zone. At the end of these same years, the sharp rise in interest rates (from 6.5% to 10% in the United States, from 2.5% to 8% in the euro zone) triggered a real estate crisis – decline in real estate construction , rise in household defaults on mortgage loans – and ultimately a decline in overall activity.

The rise in interest rates from 1999 (from 4.5% to 6.5% in the United States, from 2.5% to 4.75% in the euro zone) led to a stock market crisis: this is the bursting of the “Internet bubble” (stocks of new technology companies suffer the most). This crisis is leading to a significant decline in corporate investment and a lasting rise in unemployment, especially in Europe.

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