I am not convinced by it, here is one excerpt from my latest Bloomberg column: Ramaswamy has called for the US Federal Reserve to stabilize the dollar in relation to the price of commodities, rather than to the consumer price index. That formula is unlikely to bring monetary stability (or tame business cycles) in part because commodity
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I am not convinced by it, here is one excerpt from my latest Bloomberg column:
Ramaswamy has called for the US Federal Reserve to stabilize the dollar in relation to the price of commodities, rather than to the consumer price index. That formula is unlikely to bring monetary stability (or tame business cycles) in part because commodity prices themselves are notoriously unstable.
Consider the five years leading up to 1994, when consumer prices increased more than 19% but most commodity prices fell. Or the years from 2004 to 2008, when commodity prices rose by about three times but US price inflation rates were roughly constant, in the range of 2%. In other time periods, the relationship between commodity prices and consumer inflation is murky…
I am reminded of economist Robert Hall’s 1982 “ANCAP” proposal to stabilize the dollar with a commodity basket. Hall argued that a bundle of ammonium nitrate, copper, aluminum and plywood (thus ANCAP) had proved stable in terms of the dollar in times past. He was right about that. But the rise of China and other nations brought an unprecedented commodity price boom. Had the US tried to stabilize the value of the dollar in terms of those commodities, the Fed would have had to apply significant deflationary pressure to stabilize the relevant commodity price index. Actual monetary policy would have been a disaster.
There is much more at the link.
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Economics, Uncategorized