Thursday, October 22, 2009

Sneaking Dollar Inflation

The graph on the right (source: The Economist) gives us a hint of how dollar inflation may be triggered under a scenario of excessive monetary liquidity and budget deficits. Interest rates will not remain low for long as the risk of deflation becomes negligible and the need to finance the budget deficit remains high, no matter how sluggish is economic growth, since the latter may reflect the negative impacts of awkward economic policies on long-run aggregate supply growth. Are we destined to live the seventies all over again?

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