Quarterly Bulletin
Houblon-Norman Essays Articles
| Winter 2005 | Share prices and the value of workers |
| Autumn 2003 | Inflation
targeting and the fiscal policy regime: the experience in
Brazil 
(104k)(by Francesco Giavazzi, Houblon-Norman Fellow and Professor of Economics at Bocconi University, Milan and Visiting Professor of Economics at the Massachusetts Institute of Technology). This article reviews the recent experience of Brazil showing that credit risk is at the centre of the mechanism through which a central bank might lose control of inflation. Brazil during 2002 came close to a situation where fiscal policy hindered the effectiveness of monetary policy. But in early 2003 a change in investors' perception of the long-run fiscal stance brought the economy back to normal conditions, reducing credit risk, stabilising the exchange rate and, through these two variables, inflation expectations, inflation and the dynamics of the public debt. Brazil's experience could thus offer useful lessons for other emerging market economies, which consider adopting inflation targeting as their monetary policy rule. The optimal rate of inflation: an academic perspective
(80k)(by Peter Sinclair, Houblon-Norman Fellow and Professor of Economics at the University of Birmingham). In an economy free of all imperfections, inflation should be slightly negative. Prices should keep dropping, at the real rate of interest. Any higher rate of sustained inflation (or lower deflation) would reduce the benefits from holding real money. Central banks typically aim for modest positive inflation, however. This article explores five types of imperfection: inertia in nominal prices, the need for distorting taxes, market power for retail banks, the value of the option to cut nominal interest rates in bad times, and menu costs. It concludes that the combined effect of these imperfections is in practice likely to justify a small positive rate of inflation. |
