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BIS Publishes Semi-Austrian Monetary Policy Analysis

May 4, 2006

Via the Economics Focus[Not available online for non-subscribers] of the latest The Economist I found out that the Bank of International Settlements, which is a international organization for central banks, have published a working paper which is surprisingly good, considering who published it.

I haven't had time yet to read it through carefully, but a quick look revealed several interesting details.

First, it explicitly mentions the Austrian school and Hayek (though not Mises) and argues that its business cycle theory is a very useful theory for understanding how economic imbalances are created.

Secondly, it argues against the inflation targeting views held by Ben Bernanke and many other central bankers, and points out that trying to target a certain price inflation rate can be destabilizing in the face of supply shocks (both positive and negative). It also criticized in this context those who thinks that negative supply shocks should be allowed to express itself in the form of higher prices, while positive supply shocks should be prevented from expressing itself in the form of lower prices through an increased money supply.

Thirdly, it argues against the prevailing view of non-Austrian economists that price deflation is necessarily a bad thing.

Fourth, it warns that the seeming success of central bankers in the form of relatively small cyclical fluctuations in recent years could reveal itself to be an illusion when the increasing imbalances in America proves unsustainable.

Needless to say, there are some parts in the paper that can be criticized, but again it is still remarkably good considering from whom it came from.

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