How Should Monetary Authorities React to Higher Inflation

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Table of Contents

Introduction
Literature Review
Critical Analysis
Implications
Conclusions and Recommendations
Reference

Introduction

Economics is one of the bases on which modern human society is built. The levels of people’s wellbeing, their incomes and expenses, the rates of industrial and agricultural development, and many other factors depend on and derive from economics. At the same time, there are serious threats to this basis of the proper social development that Sloman and Hinde (2006) call the “traditional macroeconomic issues” (Sloman and Hinde, 2006, Chapter 6).

These issues include unemployment, the unequal balance of payments, problematic economic growth, and inflation. The latter is the most dangerous issue in many respects. First, inflation means a decrease in the value of the local currency. Second, inflation is caused by increased spending and leads to increased prices. Third, inflation slows down the economic growth of the country. Therefore, national monetary authorities should react properly to higher inflation rates.

Literature Review

The review of the relevant scholarly literature allows coming closer to defining the techniques that monetary authorities can use in situations of inflation increase. Thus, Begg, Dornbusch, and Fisher (2008) focus predominantly on the meaning of inflation for the overall bargaining power of people. More specifically, these authors connect the uncertainty regarding inflation rates with the uncertainty that people experience regarding the real values of their incomes (Begg, Dornbusch, and Fisher, 2008, p. 506). Therefore, what monetary authorities can do in this situation is provide people with actual inflation projections and specifically designed strategies of inflation reduction, which will be a monetarist approach allowing the economy to recover through its resources.

Critical Analysis

Further on, Griffiths and Wall (2004) consider the importance of regulatory policies implemented by the government, and the monetary authorities it controls, for developing people’s confidence during inflation (Griffiths and Wall, p. 414). Thus, the uncertainty associated with inflation can be reduced when people see that the authorities work on solving the problem. An example of such a policy is the Keynesian approach taken by the Bank of England that establishes interest rates about the national economic goals, participates in the international economic transactions, and maintains “confidence in the note issue” (Griffiths and Wall, 2004, p. 414).

Moreover, McAleese (2004) expresses an interesting point of view according to which inflation is first of all the product of governmental activities. Monetary authorities, as the bodies that are usually subordinated to the government, thus also play an important role in inflation emergence and elimination (McAleese, 2004, p. 282). According to McAleese (2004), inflation is sustained when the money supply is accompanied by permanently increasing spending levels (McAleese, 2004, p. 283). Therefore, the best alternative for monetary authorities to react to higher inflation is to reduce its regulatory influence in private enterprises and banks and limit the amount of money supply in the country. In other words, the monetarist approach should be limited in favor of the Keynesian one.

Implications

Accordingly, the findings of the above review of the relevant scholarly works allow stating that the major role in forming an inflation situation in a country should be attributed to the government and the monetary authorities it controls (McAleese, 2004, p. 283). Therefore, the task of reacting to higher inflation is to complete the task for the monetary authorities to solve. The basic practices that such monetary authorities as the central banks, the national treasury, and the ministry of finance can implement include:

Limiting the governmental regulation of private financial institutions and enterprises;
Maintaining and increasing confidence in the value and strengths of the local currency;
Maintaining control over the note issue in the country;

At the same time, the fact that none of the discussed authors considers the possibility of artificial price regulation about inflation allows assuming that such a practice is not efficient and can bring more damage to the country’s economy than benefit it. So, monetary authorities should prefer a Keynesian approach to inflation stabilization rather than a monetarist approach.

Accordingly, the implications of the above-discussed findings are rather important. The role of monetary authorities of every country in reacting to higher inflation rates is crucial, and it becomes even more important when one realizes the fact that the inflation regulatory policies affect not only the economic conditions of the country but its social and political development and the lives of ordinary people in this country. Depending on the inflation regulatory policies implemented, people’s income can be devaluated or increased in value; the bargaining power of people can grow or decline; the overall levels of wellbeing in the country might increase or decrease.

Conclusions and Recommendations

Therefore, the above discussion allows concluding that any policies through which monetary authorities react to higher inflation rates in a country should be context-based, i. e. Keynesian. What can be recommended in this respect is that monetary authorities should find a perfect balance between regulation and deregulation in providing their policies, especially about private financial and industrial entities. Artificial price regulation or issuing additional banknotes do not work alone, so monetary authorities should combine various approaches to achieve success in any particular situation in the objective reality.

Reference

Begg, D., Dornbusch, R., and Fisher, S. (2008) Economics, 9th Ed., McGraw Hill Higher Education.

Griffiths, A. and Wall, S. (2004) Applied Economics, 10th Ed., Financial Times / Prentice Hall.

McAleese, D. (2004) Economics for Business: Competition, Macro-Stability and Globalisation, 3rd Ed., Financial Times/ Prentice Hall.

Sloman, J. and Hinde, K. (2006) Economics for Business, 4th Ed., Financial Times/ Prentice Hall.

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How Should Monetary Authorities React to Higher Inflation

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