Growth and inflation: Whose speed limit?

Neste artigo, achei interessante a perspectiva e reflexão sobre a relaçao entre o ritmo de crescimento economico e o crescimento da inflação.

Modern economic growth is based on a certain resource-intensity which is not particularly flexible in the short to medium run. Neither is the supply of critical resources, including and especially petroleum, particularly elastic in the short to medium run. Rapid economic growth is possible up to the point at which resource demand hits existing supply capacity. After that, it can only proceed as supply grows or the efficiency of production rises. And the rate at which those things proceed will be driven, in no small part, by the price path of the bottleneck resource. At $200 per barrel, the incentive to invest heavily in oil exploration and oil alternatives is pretty significant.

Unless, that is, some other factor constrains growth at a pace slower than we’d expect supply and efficiency shifts to occur. That factor could be a massive economic collapse brought on by financial crisis. Or (and some will say I repeat myself) it could be due to central-bank action.

A central bank determined to contain inflation and which uses a measure of inflation heavily influenced by key resource prices will react to rising resource prices by tightening monetary policy to slow the economy. Now, standard central-bank practice is to take some of the impact of an oil shock in inflation and some in reduced growth. The point at which the central bank is likely to step in and curtail growth is flexible. It’s also likely to differ across countries and across development stages.

I’m not quite sure what the optimal central-bank response ought to be. You can read one interesting view here. Perhaps, in the presence of substantial labour surpluses in advanced economies (and, maybe, globally) inflation is less worrying than in normal circumstances, as a lack of worker bargaining power constrains wage growth and inhibits accelerating inflation. Meanwhile, efforts to, essentially, hold down oil prices by constraining demand have the side effect of limiting exploration and innovation, which might ultimately ease the resource bottleneck.

It’s also possible that if central banks react to oil-induced inflation asymmetrically, then the outcome will simply be a shift in growth. Potential growth at a national level ceases to be relevant; global potential is the limiting factor. And to the extent that one economy slows itself to reduce its inflation rate, others have more room to grow.

The upshot of all this is: the primary economic threat from high oil prices may well be the reaction from central bankers. A slavish commitment to low and stable inflation might not be the optimal response to a world with a commodity-price speed limit


Growth and inflation: Whose speed limit? | The Economist.


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