Stephen King savages rigid inflation targets

Stephen King, Chief Global Economist at HSBC is brilliant in today’s Independent - attacking the rigid adherence to an inflation target based solely on the rate of change of consumer prices and ignoring asset price deflation. One of the best comment pieces on macroeconomic policy that I have read in a long time.

“The rigid adherence to an inflation target in a world of constant external shocks may sometimes be more a source of instability than of tranquillity. With sizeable relative price shocks stemming from globalisation, the risks of instability are all the greater. Even worse, if the public thinks that price stability is the only litmus test of economic health, the achievement of low inflation may encourage excessive risk-taking which, in turn, could undermine the achievement of broader economic objectives.”

Revision Mind Map: External Economic Shocks

This is an important topic at A2 and you can also bring in useful ideas in AS macro papers too. A revision mind map is attached together with the original mind map for colleagues who might want to amend and develop further.

Notes to students:

All economies that are partof the global trading system are exposed to one or more exogenous shocks
They can be either demand or supply side
They can be positive or negative in terms of their impact on prices, output, jobs and living standards
It is important to be able to use AD-AS analysis to show some of the effects of shocks
Evaluation is key in these sorts of questions - how large is the shock? is it temporary or longer-lasting?
Consider how policy-makers can respond to shocks and understand the importance of economic flexibility in dealing with the aftermath

External_Economic_Shocks.pdf
Global_External_Economic_Shocks.mmap