Discuss the view that price stability should always take priority over other macroeconomic objectives
Why price stability should take priority
· Importance of price stability in an economy
o Keeps exports competitive
o Maintain high purchasing power and therefore high SOL
o Avoids destabilising effect of high inflation
· Achieving price stability can also help with other macroeconomics objectives
o If exports become more competitive -> (X-M) will increase -> increase in AD -> real national income increase -> higher economic growth & lower unemployment
§ BOP can improve as a result
o Country with price stability may also be attractive to investors as they can be certain of their profit margins -> Increase in I -> increase in AD -> real national income increases -> higher economic growth & lower unemployment.
§ Improvement in Capital Account -> Improvement in BOP
Why other objectives should take priority
· Importance of achieving sustained economic growth
o Higher purchasing power allows for higher SOL
o More tools (due to higher tax revenues collected) at government’s disposal to solve myriad of economic problems.
o Policies to achieve sustained economic growth can be done without conflicting with other objectives.
§ Eg EFP/EMP -> increases output -> firms hire more factor inputs including labour -> fall in unemployment
§ Increased government spending with supply side intent e.g. to increase infrastructure spending such as transport -> can increase AS therefore reducing demand pull inflation
· Importance of achieving low unemployment
o High unemployment comes with significant costs e.g. fiscal costs, social costs
o Unemployment is an inefficient use of scarce labour resources
· Importance of achieving healthy BOP
o Healthy BOP indicates healthy current account & capital account which reflects certain state of the economy
o BOP surpluses allows country to accumulate foreign reserves which is essential to conduct exchange rate policy.
Conclusion
o Price stability is an important objective, but others cannot be ignored as well.
o Whether it should take priority will depend on the current status of the economy.
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