Monday, January 16, 2012

China inflation down - stimulus should be up

Chinese economists may view their work as policy-makers as an engineering problem. This is not dissimilar to the optimal control school of economists in the pre-rational expectations era. Of course, they have a greater degree of control than current Keynesians. What this means is that if we get a slowdown in inflation, there is more room for stimulus from the Bank of China. 

Inflation is moving lower in China given the decline in food prices. Food is a more important component in their inflation index. The supply shock of 2011 is starting to be reversed. This leaves room for more aggressive growth policies, or at least this is the hope from the rest of the world. Every central banker is now looking to a,lowering of inflation which will give them the green light for stimulus.

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