Rich nations should let inflation rise -World Bank economist

WASHINGTON, March 19 Tue Mar 19, 2013 4:25pm EDT

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WASHINGTON, March 19 (Reuters) - Industrialized countries should consider a temporary burst in inflation of about 4 percent to address large public debts, the World Bank's chief economist said on Tuesday, joining other prominent economists who have called for greater inflation tolerance.

"I feel increasingly that maybe there is a case for a certain amount of controlled inflation for industrialized countries," the bank's top economist Kaushik Basu told an audience at the Center for Global Development in Washington.

"Inflation is a way to balance out some of your debts .... perhaps a targeted inflation of something like 4 percent for a couple of years and then inflation is pulled back," he added.

He acknowledged cutting inflation would be hard to do but allowing inflation to rise for a couple of years would help lower the total cost of debt.

Olivier Blanchard, the IMF's chief economist, argued in 2010 that the Federal Reserve's inflation target of 2 percent is too low given the severity of the loss of employment and low growth. Former IMF chief economist, Kenneth Rogoff, a co-author of a study of economic downturns following financial crises, also championed the idea.

Federal Reserve Chairman Ben Bernanke has pushed back at the idea of raising the inflation target above 2 percent. In congressional testimony on Feb. 2, 2012, he said: "We are not seeking higher inflation, we do not want higher inflation and we're not tolerating higher inflation."

Basu said the global economy was undergoing a period of shifting tectonic shifts and emerging economies will be "clearly in the driver's seat" by 2015 when the pace of growth begins to pick up.

"The state of economic turmoil and economic slowdown is going to last for at least two more years, into early 2015," he said, adding: "Up to that time we will continue to see global turmoil and a tendency toward stagflation and recessionary conditions in some places."

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