Saturday 30 August 2014

So We Take A Break on Monetary Policy?

I pose the question chiefly to fellow economists because a piece by prominent economist, David Ndii  has made a proposition whose conclusion simply drops the question mark. David's commentaries usually persuade the conclusions they make.
This one, unfortunately doesn't. What could have helped lead to a somewhat different conclusion is left out for another day. That is why David readily accepts the Sargent-Wallace theory of 'rational expectations' and makes a blanked conclusion that "monetary policy may not be fit for purpose".
I disagree. Both demand-side and supply-side are important. If government borrowing goes towards sorting out supply, then the Central Bank should watch demand pressure on inflation. To argue otherwise is to imply that the so-called core-inflation - non-food-non-fuel - is not binding on Kenya, which is not the case.
Even Milton Friedman's critique of monetary policy, which provided an entry point for the Sargent-Wallace argument, wasn't unqualified. To Friedman, monetary policy is a "string" that you can pull to sort out demand challenges (together with fiscal policy, if we were to bring Keynes into the debate); but you "cannot push on the string", meaning it cannot be monetary policy alone. This is the argument in Friedman's 1968 American Economic Association Presidential address that I could have liked David to bring into the essay.         

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