IIMR Annual Conference 2021

Will more inflatino follow Covid-19? And what does that say about contemporary economics?

The IIMR Annual Conference of 2021 took place on the 1st of December. The full programme is available here.

Introduction

In March 2020 as fiscal and monetary stimuli raised money growth dramatically across much of the developed world, the Institute of International Monetary Research (IIMR) was somewhat of a lone voice in warning that this wold be inflationary. Now, with economies opening up, by the final quarter of 2021, our predictions have proved correct. On the 1st of December 2021, our annual monetary conference, which was partly a live event but partly virtual, saw a top class panel of speakers from both sides of the Atlantic present a number of different perspectives on the likely consequences of the rise in inflation, with some lively debates ensuing in the question and answers sessions which followed.

Session 1 - What determines inflation?

Chairperson: Paul Mizen

1 a) John Greenwood and Steve Hanke - On monetary growth and inflation in leading economies, 2021-22: relative prices and the overall price level

The authors demonstrate, using data from Japan in particular, the strong link between excess money growth and inflation. They also point out that the recent rise in prices was driven by increase in the cost of goods rather than services, an unusual phenomenon in the last 25 years.

1 b) Kent Matthews and Kian Howe Ong - Is inflation caused by deteriorating inflation expectations or excessive money growth?

Based on empirical data, the authors found that excess monetary growth is an important influence in the long term, but as people's expectations influence what they do with our money, expectations do have a role to play in affecting inflation in the short term.

1 c) Juan Castañeda, Tim Congdon and Jose Luis Cendejas: The 2020 money supply explosion - and the return of inflation: explanation and discussion

The authors remind the audience how badly wrong some leading economists had been in forecasting inflation since the outbreak of Covid-19 pandemic. Both Olivier Blanchard, formerly of the IMF and Richard Clarida, former Vice President of at the US Federal Reserve, had predicted prolonged deflation -- but they were wrong. The speakers warn that far from being transitory, inflation in the US could be worse still in 2022 and could even reach 10% per annum.

Session 2 - Central banking after Covid-19; long-term threats to monetary stability

Chairperson: James Forder

2 a) Michael Kumhof - The Chicago plan revisited: the macroeconomics of sovereign money

The Chicago Plan is a radical proposal from the 1930s which was designed to make financial systems safer in the aftermath of the Great Depression. It has certain similarities with the current discussion about Central Bank Digital Currencies. It envisages the separation of the monetary and credit functions of the banking system, replacing the fractional reserve system by a demand that banks always hold enough liquid assets to cover 100% of their loans. It was popular with politicians but not with banks and thus rejected.

2 b) William Allen - QE and inflation: is QE always wicked?

Quantitative Easing is the purchase of assets from commercial banks by central banks. William explains its mechanism and the reasons for implementing it. In particular, that in March 2020, it was the only way of addressing an “avalanche” of bond sales. Focussing on the UK, he questions the scale of the measures, especially in the UK and discusses how best it can be reversed, which he said can be difficult.

Session 3 - Money and inflation in central bank models

Chairperson: Ryland Thomas

3 a) Victor Murinde - How should developing countries react to the current upsurge in global money growth?

The author surveyed a selection of developing countries, considering how the surge in global money growth has affected them. Some have fared better than others with relatively low inflation, but some countries in sub-Saharan Africa currently have an even worse inflation problem than developed nations. Exchange rate depreciation has been a particular problem for some countries.

3 b) Scott Sumner - The great forgetting: is inflation caused by irresponsible monetary policy or excessive money growth?

The speaker asks why monetarism has fallen out of favour in recent years. His theory is that it tends to be popular when inflation is high, so the rise of alternative viewpoints in the relative stability of the period 2000-2019 is no surprise. Now that things have changed, a targeting regime is needed, such as targeting nominal GDP or inflation.

3 c) Robert Hetzel - New Keynesianism in central banking: friend or foe?

The speaker discusses the New Keynesianism which is now dominant in central banks and universities. He laments the lack of any real debate between monetarists and Keynesians, as was the case in the 1970s. New Keynesiansm’s modelling claims to be based on rational assumptions but why then have we had recessions? Mr Hetzel advocates a core monetarist position – aiming for price stability.