Philip Arestis - Policy Implications of the Crisis
Philip Arestis, Cambridge Centre for Economic & Public Policy, University of Cambridge Speaking at the Workshop: 'Developing Joint UK Policy Responses to the Financial and Economic Crisis' organised by the Bretton Woods project and School of Oriental and African Studies, Research on Money and Finance, Dec 15th, 2008
Philip Arestis explained that monetary policy in the last years focussed on frequent interest rate changes to control inflation. However, given the enormous household indebtedness and asset holding, household consumption has become much more sensitive to interest rate changes. Low interest rates create bubbles, whereas high interest rates put pressure on vulnerable groups in society and have regressive distributional effects. Therefore, monetary policy should not only focus on inflation measured by the consumer price index but target net wealth, since this is the transition mechanism between asset prices, debt and consumption. The other presentations also emphasized that asset price inflation had been seen as "normal" and part of "good banking".
