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Sri Lanka’s Central Bank Governor slams inflation control

ECONOMYNEXT – Sri Lanka’s Central Bank Governor slammed inflation control saying such policies have led to stagnation in many countries and the time has come to focus on growth and full employment as the world is gripped by a Coronavirus crisis.

“The fear of inflation cultivated since the interwar German hyperinflation is such that even moderate inflation is looked down upon as leading more or less definitely to hyperinflation,” Governor W D Lakshman told a seminar jointly organized with Asian Development Bank Institute.

“A little bit of inflation we are told is like a little bit of pregnancy.

“In the arguments in economics about the trade-off between stability and growth, one of the elements of stability, perhaps the most important one highlighted as taught in the mainstream is price inflation.

“After the supposedly conclusive destruction of the hypothesis underlying the Phillips Curve, we are told that to think of a trade-off between inflation and growth is wrong and that inflation must be tamed at all costs if one wants to promote growth in the country.”

The Phillips Curve depicts the relationship between inflation and employment as observed by William Phillips during the Bretton Woods period when the Federal Reserve’s loose policy, in particular, drove up inflation and eventually led to a collapse of the gold peg in 1971 amid a commodity and precious metal boom.

“Rightly or wrongly due to IMF intervention or otherwise, the inflation dragon was supposed to have been slain in most countries in the 1980s,” Governor Lakshman said.

“We in Sri Lanka also have witnessed a similar situation after the early 1980s or the late 1970s, which witnessed about 20 percent annual inflation for a number of years in that decade.

“The bulk of the countries in the world taken individually have been relatively stable in this sense for the last few decades – in the sense of low inflation

“But from other angles world economy has become very unstable indeed.”






Before he became Sri Lanka’s central bank Governor, Lakshman said he was professing alternative ideas in the ‘post-Keynesian’ paradigm.

He said the Bank of Japan in the 2000s was “so unduly concerned about inflation he refused to ease monetary conditions in early 2000s” despite Japan seeing deflation at the time.

“But if easing money and expansionary fiscal policy are needed to revive economic activity in a time of deflationary pressures or at a time of low investment, not to take such action to promote growth for fear of inflation is nothing but ideological dogmatism,” Governor Lakshman said.

“Frequents financial crisis which the world economy has witnessed in the past shows how unstable the global economy has become.”

During the Asian financial crises, policies of austerity were followed, which tended to worsen the lives of people who suffered indebtedness, bankruptcy, and unemployment, he said.

The world was not in the midst of a Covid-19 shock.

Amid the Covid-19 Sri Lanka’s central bank has also provided liquidity to lower rates and help the public, business, and the budget.

Low inflation in many countries in recent years has brought stagnation, he said.

“Excessive focus on inflation has detracted attention away from the use of full employment and economic development,” Governor Lakshman said.

“The widespread assertion has been that price stability is a precondition of growth. It has been a period in the world where inflation was supposed to have been finally tamed. But conditions of low inflation have produced only stagnation in those countries.

“High time, I suppose we should begin to give greater prominence to growth and full employment but without at all pandering to stability. That is for normal times.

“We have gone through and we are still going through a time when none of the above mattered very much in policymaking.”

His comments came as the Federal Reserve and other reserve currency central banks are pumping unprecedented volumes of money into the credit system amid the Covid-19 crisis.

Gold prices have now risen to a historic high of over 2000 dollars an ounce.

The Fed also pumped large volumes of money after the so-called ‘Great Recession’ that came from burst financial and commodity bubble triggered by the Fed.

Classical economists have blamed the bubble on the so-called Bernanke Doctrine, articulated in a speech in 2002, which sought to pre-emptively ward of predicted deflation in the US by loose policy (Deflation: Making Sure “It” Doesn’t Happen Here). (SB-Colombo/Aug11/2020)

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  1. Thank god at last we have a central bank governer shedding light on inflation. Am no economist but common sense prevail when you view growth and inflation. The
    devil is not as black as you imagine

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