Money Isn’t Neutral: Why Economic Stabilization Schemes Are Counterproductive

by Frank Shostak

For most commentators economic stability refers to an absence of excessive fluctuations in key economic data such as real gross domestic product (GDP) and the consumer price index (CPI).

An economy with constant output growth and low and stable price inflation is likely to be regarded as stable. An economy with frequent boom-bust cycles and variable price inflation would be considered as unstable.

According to popular thinking stable economic environment in terms of stable price inflation and a stable output growth acts as a buffer against various shocks. This makes it much easier for businesses to plan. In this way of thinking in particular, price level stability is the key for economic stability.

For instance, let us say that a relative strengthening in consumer’s demand for potatoes versus tomatoes took place. This relative strengthening is depicted by the relative increase in the prices of potatoes versus tomatoes.

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