20180717-NATIXIS-Another_theory_of_inflation_in_the_long_run_will_have_to_be_found_5页_713kb

Flash Economics Summary

Core Content

The document discusses the long-term determinants of inflation, challenging the traditional monetary neutrality theory, which posits that inflation is primarily driven by money supply growth. It highlights the need for an alternative theory of inflation in the long run due to empirical evidence that contradicts the monetary neutrality theory.

Main Views

• Monetary Neutrality Theory is the conventional view, suggesting that in the long run, inflation is determined by the growth of the money supply. This theory assumes that real economic variables are not affected by monetary policy.
• However, the document argues that this theory has been disproven by empirical data, especially in the euro zone.
• Two alternative theories are proposed:
  • Neo-Fisherism: Inflation is determined by the nominal interest rates set by the central bank. According to this theory, raising interest rates increases inflation, which contradicts traditional monetary policy.
  • Labour Market Theory: Inflation is influenced by nominal wage growth, which is shaped by the structure and rules of the labour market. Thus, labour market policies are key to long-term inflation control.

Key Information

• The monetary neutrality theory implies that:
  $$
  M = m p Y
  $$
  Where:

  • $M$ is the money supply
  • $m$ is a constant
  • $p$ is the price level
  • $Y$ is real output

• In terms of growth rates:
  $$
  \mu = \Pi + g \quad \text{or} \quad \Pi = \mu - g
  $$
  Where:

  • $\mu$ is the rate of money supply growth
  • $\Pi$ is inflation
  • $g$ is real growth

• The document references charts that compare the evolution of money supply to real GDP and inflation. These charts show that the monetary neutrality theory is no longer valid, as the relationship between money supply and inflation does not hold consistently.

• It emphasizes that central banks need to rethink their long-term monetary policy because the monitoring of monetary aggregates may no longer be effective if inflation is not determined by money supply growth.

Conclusion

• The traditional monetary neutrality theory is no longer supported by the data.
• Two alternative theories are presented:
  • Neo-Fisherism: Inflation is driven by nominal interest rates.
  • Labour Market Theory: Inflation is driven by nominal wage growth and labour market policies.
• The choice between these theories has significant implications for monetary policy and economic forecasting.

Disclaimer

• The document is intended for professionals and qualified investors only.
• It is confidential and not a personalized investment recommendation.
• No liability is accepted for the distribution or use of the document.
• Natixis is not responsible for the accuracy or completeness of the information provided.
• The document is subject to regulatory restrictions in various jurisdictions, including the European Central Bank (ECB), ACPR, FCA, DFSA, and others.
• The views expressed are those of the authors and may differ from those of Natixis or other entities.