Definition of Stagflation in Wikipedia

[torero 10]

"Stagflation is a period of inflation combined with stagnation (that is, slow economic growth and rising unemployment), generally including recession.[1] The portmanteau term "stagflation" is generally attributed to British Conservative MP and later Chancellor of the Exchequer Iain Macleod, who coined the term in a speech to Parliament in 1965.[2][3][4]

 

Economists have identified two principal contributing causes of stagflation. First, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable.[5] Second, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets. When combined, the presence of both these factors is more than sufficient to launch an era of stagflation. For example, policies which promote growth in the money supply to allow consumers to afford higher priced oil contribute as a cause for runaway inflation, even if implemented to fight stagnation or recessions. The global stagflation of the 1970s is often blamed on both causes: it was started by a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to try to avoid the resulting recession and stagnation, causing a runaway wage-price spiral.[6]

 

John Maynard Keynes wrote in The Economic Consequences of the Peace that governments printing money and using price controls were causing a combination of inflation and economic stagnation in Europe after World War I. Stagflation was also a very serious macroeconomic problem in the 1970s. In contrast to central bank responses to the oil price spike of the 1970s where similar policies were pursued on both sides of the Atlantic, the 21st Century began with America going one way to fight recession and Europe going the other way to fight inflation."

 

US and European executing different policies to deal with stagflation!!!! Now what?!!!! Who's coming out alive? Any analysis and opinions on this one?

[firewalker 10]

US and European executing different policies to deal with stagflation!!!! Now what?!!!! Who's coming out alive? Any analysis and opinions on this one?

 

I don't think there is an easy answer to that one...

 

We should look at the tools available to policy makers. Basically I would divide them into two kinds of instruments:

 

- monetary policy: implemented by the central bank (Fed or ECB)

- fiscal policy: created by the parliament/government of a nation

 

Typically the central banks 'play' with the interest rates... I guess one of the reasons policymakers use this as a tool, is because fiscal policy changes take a longer time to have effect (for example lowering taxes).

 

The big problem is in a situation such as stagflation, where we see rising prices (inflation) and business conditions getting worse (decreasing output), there is no easy way to offset both of these effects simultaneously. Measures taken to put a stop to inflation (more restrictive monetary policy) often means less government spending and as a result less jobs, more unemployment and less productivity. Measures taken to help avoid recession (by increasing aggregate demand) lead to higher inflationary pressures. So it's something of a Catch-22.

 

So what can governments do? Perhaps they just need to sit it through and let the natural cycles take care of themselves?