Higher interest rates are meant to lower inflation. US economist John Cochrane says there's only 'shaky' evidence it worksWhen the Reserve Bank of Australia invited US economist John H Cochrane to present a paper at its annual conference, it would have had a fair idea what it was getting. He had just published a book outlining his views.
This is an economist at Stanford University — having previously taught at the prestigious University of Chicago, and completed his bachelors degree in physics at MIT before getting his PhD in economics at the University of California at Berkeley — who seems to be saying there's little evidence higher interest rates lower inflation.
"Actually, the pain has been a lot less than people thought, because the rate rises stayed below inflation — as long as interest rates are below inflation, they're paying you to borrow money. While few still adhere tightly to the Taylor rule, clearly including at the RBA, there were many prominent economists sceptical that inflation would fall while real interest rates were deeply negative.
"There was a one-time handing out of money, and that inflation kind of goes away on its own, which is also what we're seeing, without tremendous action by central banks. However, Australia's surplus is destined to be short-lived, relying on high commodity prices, the lowest unemployment levels in nearly 50 years and high inflation to boost tax revenues.Federal Treasurer Jim Chalmers warns a decline in iron ore prices and a softening labour market will limit the size of any budget surplus.
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Source: FinancialReview - 🏆 2. / 90 Read more »