To avoid having two or three inflation points above target is worth taking a lot of pain!

According to Rogoff who writes: “The Exaggerated Death of Inflation”:

More fundamentally, where, exactly, does one draw the line between advanced economies and emerging markets? The eurozone, for example, is a blur. Imagine that there was no euro and that the southern countries had retained their own currencies – Italy with the lira, Spain with the peseta, Greece with the drachma, and so on. Would these countries today have an inflation profile more like the United States and Germany or more like Brazil and Turkey?

Most likely, they would be somewhere in between [that´s inflation of 4% or 5%]. The European periphery would have benefited from the same institutional advances in central banking as everyone else; but there is no particular reason to suppose that its political structures would have evolved in a radically different way. The public in the southern countries embraced the euro precisely because the northern countries’ commitment to price stability gave them a currency with enormous anti-inflation credibility.

As it turned out, the euro was not quite the free lunch that it seemed to be. The gain in inflation credibility was offset by weak debt credibility. If the European periphery countries had their own currencies, it is likely that debt problems would morph right back into elevated inflation.

And they now are two or more inflation points below target. Don´t they wish they had retained their own currencies?

HT Travis V

3 thoughts on “To avoid having two or three inflation points above target is worth taking a lot of pain!

  1. We all hope we would had retained our own currencies. Many, including me, didn’t foresee what kind of nightmare euro would be. I did not realize they would abandon 2% inflation target and run all non-German economies to ground.

  2. Yes, imagine the PIGS with robust growth, 5 percent inflation and lots of tourists taking advantage of cheap currencies. What a disaster!
    Whew! They really dodged the bullet.
    Rogoff is demented, if he thinks 25 percent unemployment is preferable to moderate inflation.

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