Searching for stable prices
The U.S. Federal Reserve’s statutory objectives for monetary policy are “maximum employment, stable prices and moderate long-term interest rates.” Article 1 of the Bank of Korea Act states that the primary purposes of the Bank of Korea are to pursue stability in prices and financial markets.
Achieving stable prices is the prime objective of all central banks. After the global financial crisis, the role of central banks has expanded. The Fed and the Bank of Japan have promoted quantitative easing while the European Central Bank and the BOK promoted a monetary-easing policy. Unlike in the past, the central banks have aggressively released money to boost economic recovery.
But instead of keeping rising prices stable, the banks are having trouble preventing them from falling. High prices are problematic, but it is more serious if they are too low. Economic stability means maintaining prices without them soaring or plummeting. Japan and the 18 countries using the euro in the eurozone are already in deflation. Korea is also at risk. The United States is the only economy on track to recovery, but its prices are still low.
No one expects prices to rise in the near future. Consumption and investment are not likely to go up as households are ridden with debt and companies haven’t found growth engines. Under these circumstances, one of the roles the central banks play is spreading a psychology of anticipating inflation. When people expect price hikes, they spend more. Then total demand grows and the economy can escape a slump.
The BOK and other central banks are making such efforts, releasing a tremendous amount of money for this reason. But in reality, the effect is just the opposite. People expect deflation to continue and prices will fall further as a result. Here, the central bank’s true colors are revealed. Consumers who understand the central bank’s objectives know it will tighten the money when the economy recovers. So the central bank can only encourage spending by deviating from its purpose and spreading belief that it will allow price increases.
But such a belief is impossible. The central banks in developed countries are guaranteed to be independent, and they are hardly irresponsible. The BOK may not be powerful, but it is competent and faithful to its objectives. This means that lowering the interest rate further will not boost economic recovery. BOK Governor Lee Ju-yeol emphasizes that structural reform is important at this juncture. He’s right. The U.S. economy’s recovery was supported by restructuring and reform.
The prospects for 2015 are gloomy. But we need to shake off the temptation for short-term boosts. When we take on the painful journey of structural reform, we can have hope for the future.
The author is a business and industrial news editor for the JoongAng Sunday.
JoongAng Ilbo, Dec. 29, Page 30
by KIM JONG-YOON