7/12/2004

Iraqi Central Bank

Iraq is starting not only a new government but also a new system for banking in their country. In the blog The Iraqi Central Bank Law covers the topic of what new banking laws will bring to the long-term growth of the country, along with stability. By creating strict guidelines the government is hoping to maintain domestic price stability along with a stable and competitive market-based financial system.

The Law has 74 articles and 42 pages covering every topic one can think of. It very carefully defines the roles the government will play in the new system, monetary policy and open market operations. In creating such defined rules and regulations it appears to be the making of an honest government which would lead to growth.

One of the Authors points in the article was that the new laws failed to define “domestic price stability. That leaves “domestic price stability” to be defined by the “international standards” which is “slow and steady inflation.” Inflation won’t cause the country to be any poorer, in fact inflation would do the exact opposite, and it would help redistribute income. Inflation will also help the wages of the people go up, making growth the end result. Isn’t growth what really matters

6 comments:

james said...

The redistribution of wealth will only occur if wages increase along with inflation. Otherwise the people will only be paying more for products and services.

Karsten said...

You write "Inflation won’t cause the country to be any poorer, in fact inflation would do the exact opposite, and it would help redistribute income."

Inflation does a great job of redistributing income - albeit not in a very positive way. It actually hurts those on a fixed wage (think of pensioners!) as wages don't really keep up with the rate of price hikes. Inflation is something a working person can feel ambivilant about only if he knows that he has the bargaining power to hike his wage really quick.

Borrowers rejoice while lenders suffer. People consume more and save less (is this possible in the US?).

You go on to write:"Inflation will also help the wages of the people go up, making growth the end result. Isn’t growth what really matters"

Reminds me of someone who is asked in how many slices he wants his pizza cut - four or eight. He answers: "eight, I'm feeling hungry". Real growth matters, inflated growth is just, well, inflated.

To end on a positive note - inflation does seem to be better than deflation. Let me paraphrase Keynes here: it is worse to provoke unemployment than to anger the rentier!

micahnay said...

Nicely done Karsten! I agree with you one hundred percent! Inflation is the lesser of the two evils, but it really does do a lot of harm, especially to those who can’t do anything about the effects of it. Iraq needs a way of helping inflation stay low like we have in the United States. We have a system set up that we can manipulate our economy’s inflation through many channels such as interest rates.

Kid said...

In defense of my blog….I’m not saying that inflation won’t affect people individually but for the country as a whole (macroeconomics), the Iraqi economy will be strengthened. Direct quote from our text book “[t]rue, whenever prices go up somebody (the person paying the higher price) is worse off, but the person to whom the higher price is paid is better off. The two offset each other. So, inflation does not make society on average any poorer.”

Karsten said...

Kid,
let us try a thought experiment here: What would happen if a higher being decided to multiply your wages by the factor ten? Well, I guess that you would be pretty happy. Now this deity zaps prices with the same factor. Now you pretty much don't care about your raise.

If you apply this to growth you can see that in the first case something grew - your "real" ncome. As soon as the prices change you get a growth in numbers, not in reality (nominal growth).

Same effect as if basketball's ruling body would decide to double the points you get for making a shot. This would not really mean that players were twice as good because scores are twice as high. The only people who would profit would be manufacturers of scoreboards because they would have to introduce new models with larger displays.

You write this:

Direct quote from our text book "[t]rue, whenever prices go up somebody (the person paying the higher price) is worse off, but the person to whom the higher price is paid is better off. The two offset each other. So, inflation does not make society on average any poorer."

True. But as the two offset each other it doesn't make anybody richer either! There is no real growth either.

Karsten
http://curryblog.blogspot.com

Dr. Tufte said...

The original post centers on the idea of organizing a central bank that is driven by rules rather than discretion (see Chapter 13 in the Colander text). The last 30 years or so have seen a big push in this direction. Countries do worse when the officials in charge of the country can also print the money. Taking that power away is called central bank independence.

The real debate in the comments is about shoe-leather-costs (see Chapter 6 in the Colander text). Inflation can be close to costless to a society, as long as everyone's prices go up at the same rate. Except for the shoe-leather-costs; the dumb stuff that we do to try and beat inflation instead of otherwise productive work.

But, remember that inflation doesn't affect everyone the same way. It has its biggest effect on people and firms whose prices are fixed for periods of time. The less flexibility you have, the more you are hurt. Inflation turns out to be quite literally a transfer of wealth from those with inflexible nominal prices to those who are flexible.

Kid - the quality of the spelling and grammar in your post declined badly in the last paragraph.