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If government spending sprees continue, inflation will increase:

A study presented at a conference in Jackson Hole, Wyoming, found that central banks, including the Federal Reserve, will not be able to curb inflation unless governments take responsibility for spending.

According to the study, Francesco Bianchi of Johns Hopkins University and Leonardo Melosi of the Chicago Fed, increases in interest rates would result in stagnation unless government spending was adequately constrained.

“The more hawkish monetary policy would have lowered inflation by only 1 percentage point at the cost of reducing output by around 3.4 percentage points,” the authors wrote. “This is a quite large sacrifice ratio.”

Specifically, they explained that hawkish monetary policy will reduce economic output while driving inflation, since the private sector expects high inflation, if governments do not spend money responsibly.

In addition to around $433 billion in new spending, the "Inflation Reduction Act" was signed by President Biden on Aug. 16. As a result of more stringent enforcement of the tax code, the Democrats claim the bill will reduce the deficit by around $292 billion annually.

29 August 2022


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