Zhou Xiaochuan: Monetary Policy Should Consider Resource Price Experience Behind Inflation Indicators – Financial News

Zhou Xiaochuan: Monetary policy should take into account the experience of asset prices underlying inflation indicators

Author: Duchuan

　　[ 在中国金融学会会长、央行原行长周小川看来，资产价格不纳入通胀考虑已不行了，怎么纳入还需研究。 ]

　　[ 传统的通胀度量会面临四个方面的不足和挑战。其中之一，是较少包含资产价格会带来失真，特别是长周期比较的失真。通胀在长期度量上存在问题，特别是资产价格如何反映到生活质量、支出结构上。此外还有长期投资回报应折现入当期通胀的问题。 ]

“What kind of standard of living can you buy with a specific income? Is the cost of earning a specific income through work very hard, exhausting or calmer, relaxed or even enjoyable? This broad and vague concept affects people Future expectations, whether you are optimistic or pessimistic about the future. “On November 27, Zhou Xiaochuan, president of the Chinese Finance Society and former central bank governor, published an article entitled” Expanding the concept and measuring inflation “in the bank’s policy research column central on November 27 He said inflation is one of the variables to be measured, not necessarily the entire assessment of residents’ well-being and economic functioning, and monetary policy should definitely consider the experience behind inflation indicators.

This article is the third article published since the opening of the People’s Bank of China “Pentral Bank Research” column. According to Zhou Xiaochuan, the measurement of inflation that appeared to be mature in the past doesn’t seem ideal now. It is no longer sufficient to exclude asset prices from inflation considerations, but how to include them remains to be studied.

“Since the 2008 financial crisis, the global economy has not returned to the level of the pre-crisis cycle, but at the same time asset prices have risen sharply. This situation is related to changes in the global economic structure, such as global aging. , insufficient demand, commercial frictions, changes in the entire technology cycle, income distribution problems, etc. “CITIC securitiesThe Deputy Director of the Institute clearly believes that the core of the article’s discussion is whether to incorporate asset prices into inflation for a unified consideration: “It is not possible to have an uncontrolled and accommodative monetary policy due to low inflation, which will intensify economic contradictions “.

Traditional inflation measures will face four shortcomings and challenges

At present, the monetary policies of many countries are addressing the problem of not being able to effectively reach the inflation target. The latest report on the implementation of the central bank’s monetary policy pointed out that, trapped in the deadlock of “low growth, low inflation and low interest rates” in recent years, central banks of advanced economies have subsequently carried out assessments of the monetary policy framework. In August, the Federal Reserve announced the revision of the monetary policy framework after completing the assessment, implementing an average inflation target of 2%, and stated that its monetary policy response to the employment situation will depend on the actual “gap. between the maximum level of employment “of employment. It is no longer “a deviation from the maximum level of employment”, and underlines the need to study and comprehensively judge the employment situation from multiple dimensions.

Zhou Xiaochuan pointed out in the article that in the context of the new coronal pneumonia epidemic, low inflation has challenged the functioning of monetary policy and the theoretical framework of the central bank, and has also shaken the theoretical basis of the targeting system. ‘inflation. Inflation is not only the last variable for the central bank to observe economic and financial conditions, but also an intermediate variable. The central bank’s purpose of paying attention to inflation could be to improve the welfare of residents, promote the stable functioning of the economic system, and improve the public’s expectations for the future stability of the economic system.

Zhou Xiaochuan believes that traditional inflation measurement will face four shortcomings and challenges. One of these is that less including asset prices will lead to distortions, especially long-term comparison distortions. There are problems with the long-term measurement of inflation, especially the way asset prices affect quality of life and spending structure. There is also the question of long-term investment returns that should be discounted in current inflation.

Second, what income is used as an expense basket for calculating inflation. For example, currently the CPI spending basket is household disposable income. However, a considerable part of the standard of living and quality of the family / individual comes from unavailable income, including the public services they enjoy by paying taxes, pre-funded pensions, compulsory premiums, etc. The proportion of these unavailable incomes to gross income cannot be ignored: should it also be included in inflation?

The article points out that the income measurement and income that defines the spending basket and calculates the price level will influence people’s specific perception and expectations of inflation. The basket of household disposable income is smaller and the price of content outside the basket increases more. From the point of view of macroeconomic models, it is clear and indisputable that the average net income of classified workers is equal to the marginal contribution of labor to GDP.

The third is how the measurement of labor costs affects the perception of inflation. In the article, for example, some people say that his annual income (no food or drink) is only enough to buy a bathroom (about 5 square meters of housing), so if he needs two years of income to buy a bathroom in a few years, is it some kind of inflation?

Zhou Xiaochuan believes that the concept of effort / utility (ratio) is obviously related to inflation. It is necessary to understand the inflationary effect of the standard of living from the two aspects (or the relationship between the two) of the generalized price that produces utility and income in exchange for labor.

The fourth aspect is the benchmarks, comparability and framework. Zhou Xiaochuan believes that in the past the prices of investment products and goods could be considered separately, but now it may no longer be feasible. Future retirement and medical expenses are very high, depend on investment returns, and have a long-term nature. In addition to influencing the expansion of business reproduction, asset prices also involve public consumption issues such as infrastructure and environmental protection: it is no longer possible to exclude them from inflation, but how to include them is still to be studied.

How monetary policy should be implemented

“Traditional monetary policy is pegged to inflation, but the current inflation-forming mechanism has changed. If you focus only on inflation, monetary policy can only become more flexible. Monetary easing will further stimulate currency prices. Rising assets, on the other hand, will exacerbate high asset prices. Contradictions with low food inflation, “Mingming said.

In the context of the new coronary pneumonia epidemic, the experience and practice of major developed economies in recent years show that low inflation poses a challenge to the functioning of monetary policy and the central bank’s theoretical framework, and also shakes the theoretical foundations the inflation target system. Recently, Dr Richard C. Koo (Gu Chaoming) said in an interview that the inflation targeting system is practically useless now and can even cause asset bubbles.

Although the logic is clear from a theoretical point of view, there are still difficulties in actual operation.

Indeed, the discussion of whether to include asset prices in generalized inflation has been going on for a long time in academia and has not only emerged in the last couple of years. However, due to the numerous technical problems involved, few central banks directly view asset prices as monetary policy targets in practice. If monetary policy is pegged to asset prices, how? What asset price to watch? What are the weights of asset prices and food prices?

Zhou Xiaochuan pointed out in the article that many countries’ current monetary policies are addressing the problem of not being able to effectively reach the inflation target, regardless of whether they use headline inflation or nominal inflation. Recently, the Fed’s monetary policy target has shifted to the average inflation target. If inflation is very low according to the past measurement, and asset prices rise more, there will be results that cannot be ignored.It is difficult to insist that monetary policy design and response are irrelevant.

Zhou Xiaochuan said it is necessary to clarify the objectives to be achieved and how to measure the objectives. Measurement is quite complicated for the economy and society and may require a broader concept of inflation; how to measure inflation is worthy of further extensive research.

In an environment of low inflation, how to implement monetary policy has become a global problem, and the central banks of many of the world’s economies are facing similar challenges.

Of course, once the picture of inflation statistics undergoes a systematic change, the corresponding monetary policy will also undergo profound changes. This is also a discussion and a perspective on future monetary policy. Traditional monetary policy instruments focus primarily on inflation, such as adjusting inflation and the output gap through reserve ratios and open market operations. If asset prices are included in the monetary policy framework, traditional monetary policy tools may not be sufficient.

“In recent years, global monetary policies have added macroprudential functions. A very important point in macroprudential matters is to prevent financial risks. A broad monetary policy must pay attention not only to traditional inflation, but also to general asset prices. example, this year As property prices have risen too fast, broad monetary policy needs to cool the housing market through countercyclical adjustments, macroprudential rating (MPA) real estate credit rating indicators and other regulatory policies to control inflation general and asset prices. First try. “Mingming said.

Responsible director: Yang Yalong