English Deutsch Français Italiano Español Português 繁體中文 Bahasa Indonesia Tiếng Việt ภาษาไทย
All categories

2 answers

General consensus among economists is that a developing economy will have to tolerate some inflation. The problem is the central bank / government can't control themselves. Inflation is simply debasement of a currency by providing liquidity through a discount window.
Controling inflation requires reduction of liquidy, ie causing a short term recession, just like a hangover after too much drinking. Look a what Ronald Regan did in 1980, he simply put the brakes currency growth. It worked, but caused a chain of events that was well beyond expectations.
For example in areas with old marginal production facilities, like Detroit, Cleveland, Pittsburgh, and Buffalo, there were major plant closures and economic dislocation.

2007-03-10 03:54:06 · answer #1 · answered by Gatsby216 7 · 0 0

Inflation occurs when there is too much money in an economy relative to the economic activity. If money supply moves in line with economic activity it is neutral. Getting inflation under control requires a lot of discipline on the part of governments and central banks, which is not very easy, if people try to pursue their own interest.
The easiest to explain this with is salary increases. People always want more money, even if productivity has not increased. To avoid the hard decisions, these demands for higher wages may be met, while more money is pumped into the economy. The effect on purchasing power is zero, but the discussions have been stopped again for another year.
Inflation also generates inflation expectations, which than again generates real inflation. It is a vicious spiral that tends to blur view on real economic issues that need to be tackled.
In most cases tackling inflation is very painful at first, which is why it is so difficult to start. It is also very difficult to get rid of inflation expectations

2007-03-10 04:46:06 · answer #2 · answered by Cheanea 3 · 0 0

fedest.com, questions and answers