Conflicting Goals In Economic Growth

Conflicting Goals in Economic Growth


        Goals of monetary policy are to "promote maximum employment, inflation

(stabilizing prices), and economic growth." If economists believe it's possible

to achieve all the goals at once, the goals are inconsistent. There are

limitations to monetary policy.


        The term "maximum employment" means that we should try to hold the

unemployment rate as low as possible without pushing it below what economists

call the natural rate or the full- employment rate. Pushing unemployment below

that level would cause inflation to rise and thereby ruin the other objective--

stable prices, economic growth, which is our objectives in the long run.


        Overall financial stability will lead to a better balance between

consumption and saving that will make resources available for investment

purposes, reduce changes in the economy created by the inflation in the past,

and by the reactions of savers, as well as fostering high and sustainable

economic growth; and contribute towards an investor friendly environment that

will attract foreign investors to the country.


        Evidence has suggested that economies perform better, in terms of growth,

employment and living standards, in low inflation environments than they do when

inflation is persistently high. This evidence is a comparison  across countries

over long periods. The association between economic performance, measured by

growth of output or growth of productivity, and inflation. This indicates a

negative relation; that is, the higher the inflation, the lower the rate of real

growth.


        Evidence suggesting that low inflation promotes growth has motivated

recent decisions by a number of central banks and governments, most notably New

Zealand. Canada, the United Kingdom and Sweden also have moved in recent years

to establish monetary policy with official low inflation targets. Decisions to

adopt a policy objective of low inflation suggest that other policy-makers are

reading the evidence pertaining to inflation and growth as we are.


        Consistent attempts to expand the economy beyond its potential for

production will result in higher and higher inflation, while ultimately failing

to produce lower average unemployment. Therefore, most economists would argue

that there are no long-term gains from consistently pursuing expansionary

policies.


        Monetary policy can determine the economy's average rate of inflation in

the long run. And that's important for the economy, because high inflation can

hinder economic growth. For example, when inflation is high, it also tends to

vary a lot, and that makes people uncertain about what inflation will be in the

future. That uncertainty can hinder economic growth in a couple of ways--it adds

an inflation risk premium to long-term interest rates and it complicates the

planning and contracting by business and labor that are so essential to capital

form
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