Stiglitz slams inflation-targeting

It is “nonsense” that inflation-targeting is necessary for strong and stable growth, Nobel Prize-winning economist Joseph Stiglitz said in Johannesburg on Wednesday. And the “moral depravity” of financial institutions is partly the cause of the current global crisis.

Speaking in a packed auditorium at the University of the Witwatersrand, Stiglitz rejected the idea that the most appropriate way to cope with macroeconomic shock was through inflation-targeting.

He said he strongly opposed rigid inflation-targeting in all countries, and believed that the economic crisis was at least partly “the result of banks focusing excessively on inflation”.

For small, open economies such as Botswana, only 25% or more of the price of commodities is affected by the interest rate, “so to put all of the burden of adjustment on [it] is absurd”, he said.

“Inflation-targeting should be just one of the things that should be addressed,” said Stiglitz, arguing that other factors affecting the economy, such as growth and financial stability, should not be ignored.

He would not be drawn into discussion on whether South Africa’s inflation rate was acceptable. “There’s no single number [for inflation rates], and it really depends on the global economy,” he said, pointing out that if global food or energy prices increased, the public would have to accept a higher inflation rate.

Speaking more broadly, he said the world economy had been indelibly changed by the financial crisis. “The system where countries hold on to dollar reserves is falling apart. The dollar is no longer a good store of reserve because it is no longer stable. I think it’s a good idea for the world to move away from the dollar reserve. It’s simply a question of how soon that will happen,” he said.

For Stiglitz, the solution would be to create a new global reserve. “A global currency would be much more stable, much more diversified.”

Stiglitz said the economic crisis was the result of a “dysfunctional economic system” and financial institutions engaged in “moral depravity”. He said the crisis was a form of poetic justice and that institutions were eventually “hoist on the petard of their own greed”, unfortunately at the expense of the taxpayer

Of the United States, Stiglitz said the “green shoots” of economic recovery had not yet materialised, and that while the economy will be “somewhat helped” by the strong stimulus provided by the government, he did not expect employment to return to an acceptable level next year.

He said it was imperative for the structure of the US economy to change in order to make it more capable of addressing the deeper, more fundamental problems that the world will face in the future.

“We will eventually emerge from this crisis, but others will not go away. The climate crisis is not going to go away,” he said. The Intergovernmental Panel on Climate Change, of which Stiglitz was once the lead author, says a move to a low-carbon economy is one of the factors that can help avoid catastrophic climate change in future.

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