Wednesday, February 9, 2011

Inflation, inflation expectations and the usefulness of structuralism

Paul Segal (a lecturer at Sussex but also a graduate from Oxford) has an excellent entry today in the FT about inflation and inflation expectations. As you can see, there are still interesting people that think about inflation in terms of bargaining and conflicts over income distribution... with expectations playing a more central role that we have discussed.

It is important to understand that any increases in interest rates will have a direct effect on the economy through two channels: The cost of investment and the potential appreciate of the exchange rate. Giving sluggish conditions, it is unclear why one would want to do it and may only be explained by political economy considerations.

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