The distinction between nominal and real values in one of the ‘threshold concepts’ in economics. These are concepts that are fundamental to a discipline and which occur again and again. The distinction between nominal and real values is particularly important when interpreting and analysing data. We show its importance here when analysing the latest retail sales data from the Office for National Statistics.
Retail sales relate to spending on items such as food, clothing, footwear, and household goods (see). They involve sales by retailers directly to end consumers whether in store or online. The retail sales index for Great Britain is based on a monthly survey of around 5000 retailers across England, Scotland and Wales and is thought to capture around 75 per cent of turnover in the sector.
Estimates of retail sales are published in index form. There are two indices published by the ONS: a value and volume measure. The value index reflects the total turnover of business, while the volume index adjusts the value index for price changes. Hence, the value estimates are nominal, while the volume estimates are real. The key point here is that the nominal estimates reflect both price and volume changes, whereas the real estimates adjust for price movements to capture only volume changes.
The headline ONS figures for September 2023 showed a 0.9 per cent volume fall in the volume of retail sales, following a 0.4 per cent rise in August. In value terms, September saw a 0.2 per cent fall in retail sales following a 0.9 per cent rise in August. Monthly changes can be quite volatile, even after seasonal adjustment, and sensitive to peculiar factors. For example, the unusually warm weather this September helped to depress expenditure on clothes. It is, therefore, sensible to take a longer-term view when looking for clearer patterns in spending behaviour.
Chart 1 plots the value and volume of retail sales in Great Britain since 1996. (Click here for a PowerPoint of this and the other two charts). In value terms, retail sales spending increased by 165 per cent, whereas in volume terms, spending increased by 73 per cent. This difference is expected in the presence of rising prices, since nominal growth, as we have just noted, reflects both price and volume changes. The chart is notable for capturing two periods where the volume of retail spending ceased to grow. The first of these is following the global financial crisis of the late 2000s. The period from 2008 to 2013 saw the volume of retail sales stagnate and flatline with a recovery in volumes only really starting to take hold in 2014. Yet in nominal terms retail sales grew by around 16 per cent.
The second of the two periods is the decline in the volume of retail sales from 2021. To help illustrate this more clearly, Chart 2 zooms in on retail sales over the past five years or so. We can see a significant divergence between the volume and value of retail sales. Between April 2021 and September 2023, the volume of retail sales fell by 11%. In contrast, the value of retail sales increased by 8.4%. The impact of the inflationary shock and the consequent cost-of-living crisis that emerged from 2021 is therefore demonstrated starkly by the chart, not least the severe drag that it has had on the volume of retail spending. This has meant that the aggregate volume of retail sales in September 2023 was only back to the levels of mid-2018.
Finally, Chart 3 shows the patterns in the volumes of retailing by four categories since 2018: specifically, food stores, predominantly non-food stores, non-store retail, and automotive fuel. The largest fall in the volume of retail sales has been experienced by non-store retailing – largely online retailing. From its peak in December 2020, non-store retail sales decreased by almost 20 per cent up to September 2023. While this needs to be set in the context of the volume of non-store retail purchases being 14% higher than in February 2020 before the pandemic lockdowns were introduced, it is nonetheless indicative of the pressures facing online retailers.
Importantly, the final chart shows that the pressures in retailing are widespread. Spending volumes on automotive fuels, and in food and non-food stores are all below 2019 levels. The likelihood is that these pressures will persist for some time to come. This inevitably has potential implications for retailers and, of course, for those that work in the sector.
Articles
Statistical bulletin
Data
Questions
- Why does an increase in the value of retail sales not necessarily mean that their volume has increased?
- In the presence of deflation, which will be higher: nominal or real growth rates?
- Discuss the factors that could explain the patterns in the volume of spending observed in the different categories of retail sales in Chart 3.
- Discuss what types of retail products might be more or less sensitive to the macroeconomic environment.
- Conduct a survey of recent media reports to prepare a briefing discussing examples of retailers who have struggled or thrived in the recent economic environment.
- What do you understand by the concepts of ‘consumer confidence’ and ‘economic uncertainty’? How might these affect the volume of retail spending?
- Discuss the proposition that the retail sales data cast doubt on whether people are ‘forward-looking consumption smoothers’.
Have you ever wondered how your job affects your happiness? We all know that not all jobs are created equal. Some are awesome, while others … not so much. Well, it turns out that employment status and the type of work you do can have a big impact on how you feel – especially in developing countries where labour markets are usually tighter and switching between jobs can be more difficult.
A recent study by Carmichael, Darko and Vasilakos (2021) uses survey data from Ethiopia, Peru, India and Vietnam to answer this very question. The study found that the quality of work is a big deal when it comes to how young people feel. Not all jobs are ‘good jobs’ that automatically make you feel great. Although your wellbeing is likely to be higher when you’re in employment than when you’re not, there are certain job attributes that can push that ‘employment premium’ up or down. This is especially important to understand in countries like many in sub-Saharan Africa, where there aren’t many formal jobs, and people often end up overqualified for what they do.
What job attributes lead to higher wellbeing?
What then are the job attributes that are correlated with higher levels of wellbeing? The first is money: Okay, we know money can’t buy happiness, but it can certainly make life easier. We were therefore hardly surprised to find a positive and statistically significant association between hourly earnings and wellbeing.
We were also not surprised to find that a ‘poor working environment’ has a strong and highly significant negative effect on wellbeing.
Finally, feeling proud of your work is also found to be a strongly significant determinant of your wellbeing. After all, people tend to excel in things they like doing, which is probably part of the ‘transmission mechanism’ between ‘work pride’ and ‘subjective wellbeing’.
Which one of these attributes did you think had the greatest effect on wellbeing? Let me guess, many of you will say ‘earnings’. But then you would be wrong. Earnings were indeed positively associated with wellbeing and statistically significant at just about the 10% level, whereas work pride was very strongly statistically significant at the 1% level and had an effect on wellbeing that was four times greater than hourly earnings.
Putting yourself in a poor working environment on the other hand would reduce your wellbeing by almost twice as much as the earnings coefficient.
Policy implications
What does all this mean for policy-makers? If we want to make life better for young people in low-income countries, we need to tackle the problems from multiple angles.
First, young people need to be helped to get the skills they need for the job market. This can be done through things like training programmes and apprenticeships. However, not all of these programmes are created equal. Some have great results, and others not so much.
But that’s not the whole story. In many countries, there’s a massive informal job market. It’s a place where people work but often don’t have the rights or protections that formal employees do. So, even if young people get trained, they might not find the ‘good’ jobs they’re hoping for.
Changes also need to be made on a much bigger scale. This often includes decentralising public investment to include rural areas, improving infrastructure, and encouraging private investment. Strengthening labour market rules and social protection can help too, by making sure that work is safe and fair.
In a nutshell, where you work and what kind of work you do can make a big difference to how you feel.
Conclusions
If policy-makers want to help young people in low-income countries, they need both to give them the skills they require and to create better job opportunities. But policy-makers also need to make bigger changes to the way things work, like boosting production and making sure jobs are safe and fair.
In the end, it’s about making life better for young people around the world. Let’s keep working on it!
Articles
- Well-being and employment of young people in Ethiopia, India, Peru and Vietnam: Is work enough?
Development Policy Review, Fiona Carmichael, Christian K. Darko and Nicholas Vasilakos (18/5/21)
- The search for ‘meaning’ at work
BBC Worklife, Kate Morgan (7/9/22)
- Job Satisfaction Is Rising: What’s Behind The Surprising Tend
Forbes, Tracy Brower (4/6/23)
- Young workers are embracing AI, job satisfaction rising: 2023 Young Generation in Tech report
Silicon Canals (4/10/23)
- ‘These jobs can be respectable too’: Why youths in China are abandoning white-collar jobs for ‘light labor’
CNBC, Goh Chiew Tong (6/6/23)
- Does Work Make You Happy? Evidence from the World Happiness Report
Harvard Business Review, Jan-Emmanuel De Neve and George Ward (20/3/17)
- Worker well-being is in demand as organizational culture shifts
American Psychological Association, Monitor on Psychology, Heather Stringer (1/1/23)
- Understanding children’s work and youth employment outcomes in Indonesia
Understanding Children’s Work (UCW) Programme, Villa Aldobrandini and V. Panisperna (June 2012)
- Where are We with Young People’s Wellbeing? Evidence from Nigerian Demographic and Health Surveys 2003–2013
Social Indicators Research, pp.803–33, Boniface Ayanbekongshie Ushie and Ekerette Emmanuel Udoh (November 2016)
- Employment Status and Well-Being Among Young Individuals. Why Do We Observe Cross-Country Differences?
Social Indicators Research, Dominik Buttler (29/6/22)
- Employment Mismatches Drive Expectational Earnings Errors among Mozambican Graduates
The World Bank Economic Review, Sam Jones, Ricardo Santos and Gimelgo Xirinda (27/7/23)
- Youth Employment and Skills Development in The Gambia
World Bank Working Paper 217, Nathalie Lahire, Richard Johanson and Ryoko Tomita Wilcox (2011)
Questions
- How does the quality of work impact the happiness and wellbeing of young people in low- and middle-income countries (LMICs), and why is this significant in the context of job opportunities in sub-Saharan Africa?
- What are some potential solutions and strategies discussed in the article for improving the wellbeing of young people in LMICs, particularly in the context of employment and job opportunities?
- Have you ever experienced a job that significantly (positively or negatively) impacted your wellbeing or happiness? Reflect on your experience and how it influenced your overall life satisfaction?
- How is AI likely to affect the wellbeing of young professional workers?
- How is the pandemic likely to have affected job satisfaction?
China has been an economic powerhouse in recent decades – a powerhouse that has helped to drive the world economy through trade and both inward and outward investment. At the same time, its low-priced exports have helped to dampen world inflation. But is all this changing? Is China, to use President Biden’s words, a ‘ticking time bomb’?
China’s economic growth rate is slowing, with the quarterly growth in GDP falling from 2.2% in Q1 this year to 0.8% in Q2. Even though public-sector investment rose by 8.1% in the first six months of this year, private-sector investment fell by 0.2%, reflecting waning business confidence. And manufacturing output declined in August. But, despite slowing growth, the Chinese government is unlikely to use expansionary fiscal policy because of worries about growing public-sector debt.
The property market
One of the biggest worries for the Chinese economy is the property market. The annual rate of property investment fell by 20.6% in June this year and new home prices fell by 0.2% in July (compared with June). The annual rate of price increase for new homes was negative throughout 2022, being as low as minus 1.6% in November 2022; it was minus 0.1% in the year to July 2023, putting new-home prices at 2.4% below their August 2021 level. However, these are official statistics. According to the Japan Times article linked below, which reports Bloomberg evidence, property agents and private data providers report much bigger falls, with existing home prices falling by at least 15% in many cities.
Falling home prices have made home-owners poorer and this wealth effect acts as a brake on spending. The result is that, unlike in many Western countries, there has been no post-pandemic bounce back in spending. There has also been a dampening effect on local authority spending. During the property boom they financed a proportion of their spending by selling land to property developers. That source of revenue has now largely dried up. And as public-sector revenues have been constrained, so this has constrained infrastructure spending – a major source of growth in China.
The government, however, has been unwilling to compensate for this by encouraging private investment and has tightened regulation of the financial sector. The result has been a decline in new jobs and a rise in unemployment, especially among graduates, where new white collar jobs in urban areas are declining. According to the BBC News article linked below, “In July, figures showed a record 21.3% of jobseekers between the ages of 16 and 25 were out of work”.
Deflation
The fall in demand has caused consumer prices to fall. In the year to July 2023, they fell by 0.3%. Even though core inflation is still positive (0.8%), the likelihood of price reductions in the near future discourages spending as people hold back, waiting for prices to fall further. This further dampens the economy. This is a problem that was experienced in Japan over many years.
Despite slowing economic growth, Chinese annual growth in GDP for 2023 is still expected to be around 4.5% – much lower than the average rate for 9.5% from 1991 to 2019, but considerably higher than the average of 1.1% forecast for 2023 for the G7 countries. Nevertheless, China’s exports fell by 14.5% in the year to July 2023 and imports fell by 12.5%. The fall in imports represents a fall in exports to China from the rest of the world and hence a fall in injections to the rest-of-the-world economy. Currently China’s role as a powerhouse of the world has gone into reverse.
Articles
Questions
- Using PowerPoint or Excel, plot the growth rate of Chinese real GDP, real exports and real imports from 1990 to 2024 (using forecasts for 2023 and 2024). Use data from the IMF’s World Economic Outlook database. Comment on the figures.
- Explain the wealth effect from falling home prices.
- Why may official figures understate the magnitude of home price deflation?
- Explain the foreign trade multiplier and its relevance to other countries when the volume of Chinese imports changes. What determines the size of this multiplier for a specific country?
- How does the nature of the political system in China affect the likely policy response to the problems identified in this blog?
- Is there any good news for the rest of the world from the slowdown in the Chinese economy?
Central bankers, policymakers, academics and economists met at the Economic Symposium at Jackson Hole, Wyoming from August 24–26. This annual conference, hosted by Kansas City Fed, gives them a chance to discuss current economic issues and the best policy responses. The theme this year was ‘Structural Shifts in the Global Economy’ and one of the issues discussed was whether, in the light of such shifts, central banks’ 2 per cent inflation targets are still appropriate.
Inflation has been slowing in most countries, but is still above the 2 peer cent target. In the USA, CPI inflation came down from a peak of 9.1% in June 2022 to 3.2% in July 2023. Core inflation, however, which excludes food and energy was 4.7%. At the symposium, in his keynote address the Fed Chair, Jay Powell, warned that despite 11 rises in interest rates since April 2022 (from 0%–0.25% to 5%–5.25%) having helped to bring inflation down, inflation was still too high and that further rises in interest rates could not be ruled out.
We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.
However, he did recognise the need to move cautiously in terms of any further rises in interest rates as “Doing too much could also do unnecessary harm to the economy.” But, despite the rises in interest rates, growth has remained strong in the USA. The annual growth rate in real GDP was 2.4% in the second quarter of 2023. Unemployment, at 3.5%, is low by historical standards and similar to the rate before the Fed began raising interest rates.
Raising the target rate of inflation?
Some economists and politicians have advocated raising the target rate of inflation from 2 per cent to, perhaps, 3 per cent. Jason Furman, an economic policy professor at Harvard and formerly chief economic advisor to President Barack Obama, argues that a higher target has the benefit of helping cushion the economy against severe recessions, especially important when such there have been adverse supply shocks, such as the supply-chain issues following the COVID lockdowns and then the war in Ukraine. A higher inflation rate may encourage more borrowing for investment as the real capital sum will be eroded more quickly. Some countries do indeed have higher inflation targets, as the table shows.
Powell emphatically ruled out any adjustment to the target rate. His views were expanded upon by Christine Lagarde, the head of the European Central Bank. She argued that in a world of greater supply shocks (such as from climate change), greater frictions in markets and greater inelasticity in supply, and hence greater price fluctuations, it is important for wage increases not to chase price increases. Increasing the target rate of inflation would anchor inflationary expectations at a higher level and hence would be self-defeating. Inflation in the eurozone, as in the USA, is falling – it halved from a peak of 10.6% in 2022 to 5.3% in July this year. Given this and worries about recession, the ECB may not raise interest rates at its September meeting. However, Lagarde argued that interest rates needed to remain high enough to bring inflation back to target.
The UK position
The Bank of England, too, is committed to a 2 per cent inflation target, even though the inflationary problems for the UK economy are greater that for many other countries. Greater shortfalls in wage growth have been more concentrated amongst lower-paid workers and especially in the public health, safety and transport sectors. Making up these shortfalls will slow the rate of inflationary decline; resisting doing so could lead to protracted industrial action with adverse effects on aggregate supply.
Then there is Brexit, which has added costs and bureaucratic procedures to many businesses. As Adam Posen (former member of the MPC) points out in the article linked below:
Even if this government continues to move towards more pragmatic relations with the EU, divergences in standards and regulation will increase costs and decrease availability of various imports, as will the end of various temporary exemptions. The base run rate of inflation will remain higher for some time as a result.
Then there is a persistent problem of low investment and productivity growth in the UK. This restriction on the supply side will make it difficult to bring inflation down, especially if workers attempt to achieve pay increases that match cost-of-living increases.
Sticking to the status quo
There seems little appetite among central bankers to adjust inflation targets. Squeezing inflation out of their respective economies is painful when inflation originates largely on the supply side and hence the problem is how to reduce demand and real incomes below what they would otherwise have been.
Raising inflation targets, they argue, would not address this fundamental problem and would probably simply anchor inflationary expectations at the higher level, leaving real incomes unchanged. Only if such policies led to a rise in investment would a higher target be justified and central bankers do not believe that it would.
Articles
- What happens in Jackson Hole doesn’t stay in Jackson Hole
CNN, Elisabeth Buchwald (26/8/23)
- Fed Chair Powell calls inflation ‘too high’ and warns that ‘we are prepared to raise rates further’
CNBC, Jeff Cox (25/8/23)
- Inflation? This man holds the key
Politico, Geoffrey Smith and Carlo Boffa (24/8/23)
- Global inflation pressures could become harder to manage in coming years, research suggests
Independent, Christopher Rugaber (27/8/23)
- Christine Lagarde warns of long-term inflation risks after global economic upheaval
Financial Times, Martin Arnold and Colby Smith (25/8/23)
- No appetite at Fed, ECB for changing inflation goal
Reuters, Ann Saphir, Howard Schneider and Balazs Koryani (25/8/23)
- Is it time for Fed to raise interest rate target to 3%? Experts weigh in
mint, Nishant Kumar (22/8/23)
- What is the UK inflation rate and why is it so high?
BBC News (16/8/23)
- If you think the UK’s high-inflation cycle has run its course, think again
The Observer, Adam Posen (26/8/23)
Data
Questions
- Use an aggregate demand and supply diagram (AD/AS or DAD/DAS) to illustrate inflation since the opening up of economies after the COVID lockdowns. Use another one to illustrate the the effects of central banks raising interest rates?
- Why is the world likely to continue experiencing bigger supply shocks and greater price volatility than before the pandemic?
- With hindsight, was increasing narrow money after the financial crisis and then during the pandemic excessive? Would it have been better to have used the extra money to fund government spending on infrastructure rather than purchasing assets such as bonds in the secondary market?
- What are the arguments for and against increasing the target rate of inflation?
- How do inflationary expectations influence the actual rate of inflation?
- Consider the arguments for and against the government matching pay increases for public-sector workers to the cost of living.
In this third blog about inflation, we focus on monetary policy to deal with the problem and bring inflation back to the target rate, which is typically 2 per cent around the world (including the eurozone, the USA and the UK). We ask the questions: was the response of central banks too timid initially, meaning that harsher measures had to be taken later; and will these harsher measures turn out to be excessive? In other words, has the eventual response been ‘too much, too late’, given that the initial measures were too little?
Inflation rates began rising in the second half of 2021 as economies began to open up as the pandemic subsided. Supply-chain problems drove the initial rise in prices. Then, following the Russian invasion of Ukraine in February 2022 and the adverse effects on oil, gas and grain prices, inflation rose further. In the UK, CPI inflation peaked at 11.1% in October 2022 (see chart 1 in the first of these three blogs). Across the whole EU-27, it peaked at 11.5% in October 2022; US inflation peaked at 9.1% in June 2022; Japanese inflation peaked at 4.3% in January 2023.
This raises the questions of why interest rates were not raised by a greater amount earlier (was it too little, too late?) and why they have continued to be raised once inflation rates have peaked (is it too much, too late?).
The problem of time lags
Both inflation and monetary policy involve time lags. Rising costs take a time to work their way through the supply chain. Firms may use old stocks for a time which are at the original price. If it is anticipated that costs will rise, central banks will need to take action early and not wait until all cost increases have worked their way through to retail prices.
In terms of monetary policy, the lags tend to be long.
If central bank interest rates are raised, it may take some time for banks to raise savings rates – a common complaint by savers.
As far as borrowing rates are concerned, as we saw in the previous blog, loans secured on dwellings (mortgages) account for the majority of households’ financial liabilities (76.4% in 2021) and here the time lags between central bank interest rate changes and changes in people’s mortgage interest rates can be very long. Only around 14 of UK mortgages are at variable rates; the rest are fixed, typically for between 2 to 5 years. So, when Bank Rate changes, people on fixed rates will be unaffected until their mortgage comes up for renewal, when they can be faced with a huge increase in payments.
Only around 21% of mortgages in England were/are due for renewal in 2023, and with 57% of these the old fixed rates were below 2%. Currently (July 2023), the average two-year fixed-rate mortgage rate in the UK is 6.81% (based on 75% loan to value (LTV)); the average five-year rate is 6.31% (based on 75% LTV). This represents a massive increase in interest rates, but for a relatively small proportion of homeowners and an even smaller proportion of total households.
But as more and more fixed-rate mortgages come up for renewal, so the number of people affected will grow, as will the dampening effect on aggregate demand as such people are forced to cut back on spending. This dampening effect will build up for many months.
And there is another time lag – that between prices and wages. Wages are negotiated periodically, normally annually or sometimes less frequently. Employees will typically seek a cost-of-living element in wage rises that covers price rises over the past 12 months, not inflation in the past month. If inflation is rising (or falling), such negotiations will not reflect the current situation. There is thus a time lag built in to such negotiations. Even if higher interest rates reduce inflation, the full effect can take some time because of this wages time lag.
Other time lags include those involving ongoing capital projects. If construction is taking place, it will take some time to complete and in the meantime is unlikely to be stopped. Higher interest rates will affect capital investment decisions now, but existing projects are likely to continue to completion. As more projects are completed over time, so the effect of higher interest rates is likely to accumulate.
Then there is the question of savings. During the pandemic, many people increased their savings as their opportunities for spending were more limited. Since then, many people have drawn on these savings to fund holidays, eating out and other leisure activities. Such spending is likely to taper off as savings are reduced. Again, the interest rises may prove to have been excessive as a means of reducing aggregate demand.
These time lags suggest that after some months the economy will have been excessively dampened and that the policy will have ‘overshot’ the mark. Had interest rates been raised more rapidly earlier and by larger amounts, the peak level of rates may not have needed to be so high.
Perhaps one of the biggest worries about raising interest rates excessively because of time lags is the effect on corporate and government debt. Highly indebted companies and countries will find that a large increase in interest rates makes servicing their debt much harder. For example, Thames Water, the UK’s biggest water and sewerage company accumulated some £14 billion in debt during the era of low interest rates. It has now declared that it cannot service these debts and is on the brink of insolvency. In the case of governments, as increasing amounts have to be spent on servicing their debt, so they may be forced to cut expenditure elsewhere. This will have a dampening effect on the economy – but with a time lag.
The distribution of pain
Those with large credit-card debt and large mortgages coming up for renewal or at variable rates will have borne the brunt of interest rate rises. These people, such as young people with families, are often those most affected by inflation, with a larger proportion of their expenditure on energy and food. Other people adversely affected are tenants where landlords raise rents to cover their higher mortgage payments.
Those with no debts will have been little affected by the hike in interest rates, unless the curbing of aggregate demand affects their chances of overtime or reduces available shifts or, worse still, leads to redundancy.
Excessive rises in interest rates exacerbate these distributional effects.
Articles
- UK homeowners face huge rise in payments when fixed-rate mortgages expire
The Guardian, Richard Partington (17/6/23)
- Economic ‘Bazball’ will have replaced UK’s safety-first approach to inflation and growth by 2025
The Guardian, Larry Elliott (16/7/23)
- The Bank of Canada just hiked interest rates for the sixth time — is it too late?
The Conversation, Alexander David (27/10/22)
- Monetary Policy Report Press Conference Opening Statement
Bank of Canada, Tiff Macklem (12/7/23)
- Some reflections on Monetary Policy past, present and future
Bank of England, Speech, Michael Saunders (18/6/22)
- Expectations, lags, and the transmission of monetary policy
Bank of England, Speech, Catherine L. Mann (23/2/23)
- Europe’s monetary policy shift comes (too) late
DW, Henrik Böhme (6/9/22)
- Nobel Prize-winning economist says there’s no need for the Fed to keep hiking interest rates
CNBC, Sam Meredith (14/7/23)
- Three Uncomfortable Truths For Monetary Policy
IMF, Speech, Gita Gopinath (26/6/23)
- Inflation’s return changes the world
Financial Times, Martin Wolf (4/7/23)
- The next revolution in monetary policy is underway
Reuters, Felix Martin (30/6/23)
- Inflation may be coming down but its unequal effects can still have a big impact on wellbeing
The Conversation, Alberto Prati (19/7/23)
- Why central banks should stop raising interest rates
The Conversation, Muhammad Ali Nasir (27/9/23)
Bank of England’s ‘regrettable’ mistakes fuelled inflation, its former top economist saysSky News, Daniel Binns (5/9/23)
Questions
- For what reasons might a central bank be unwilling to raise interest rates by more than 0.25 or 0.5 percentage points per month?
- What instruments other than changing interest rates does a central bank have for influencing aggregate demand?
- Distinguish between demand-pull and cost-push inflation.
- Why might using interest rates to curb inflation be problematic when inflation is caused by adverse supply shocks?
- How are expectations of consumers and firms relevant in determining (a) the appropriate monetary policy measures and (b) their effectiveness?
- How could a careful use of a combination of monetary and fiscal policies reduce the redistributive effects of monetary policy?
- How might the use of ‘forward guidance’ by central banks reduce the need for such large rises in interest rates?