Finance, Forex and Investments

If a central bank had to give ups its discretion and follow a rule that required it to keep inflation low,?

If a central bank had to give ups its discretion and follow a rule that required it to keep inflation low, A. the short-run Phillips curve would shift up. B. the short-run Phillips curve would shift down. C. the long-run Phillips curve would shift right. D. the long-run Phillips curve would shift left.

Public Comments

1. Stupid question. None of the above. 1. There is no evidence to suggest that a well-defined Phillips curve actually exists. The existence of real-world stagflation proved the short-term curve was a nice theory but had no predictive value http://en.wikipedia.org/wiki/Phillips_curve#Stagflation As for the long-term curve, there are two completely different theories about it and no evidence for either. 2. Following a rule that keeps inflation low still requires great discretion on the part of a central bank. Several central banks do follow such a rule and it is extremely difficult, as evidenced by a general lack of success http://en.wikipedia.org/wiki/Inflation_targeting 3. Milton Friedman proposed an even simpler rule: keep the money supply growing at a fixed rate (typically 3%/year) http://en.wikipedia.org/wiki/Friedman's_k-percent_rule Even that has proven impossible. (After all, we are in a recession because there isn't enough money out there. The government has been spending and the Fed has been doing everything it can to increase the money supply, but there are fewer people and businesses borrowing - and most money is created by bank loans, not the Fed - so the total money supply hasn't been growing anywhere nearly as fast as anyone would like it to.) The world is just too complex to follow rules without discretion.