Abstract
This paper analyses how a financial crisis, a decade of stagnation, a global pandemic, and now a land war in Europe, have undermined all three of Paul Volcker’s verities of a well-organised society: stable prices, sound finance and good government. The subsequent Great Repricing will not be a smooth process. For a better future to follow, the consensus that low interest rates are here to stay needs to be jettisoned in favour of an old truth. If too much money is chasing too few goods, the resulting inflation cannot be held back by central bank words alone. With sound policies, though, the Great Repricing can be the start of a return to a better allocation of resources and faster growth.
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Notes
- 1.
Data on interest rates have been updated to the end of 2022.
- 2.
I described this view as the “King Canute theory” of inflation (King, 2021).
- 3.
- 4.
Davies (forthcoming).
- 5.
“The long-run secular decline in dynamism is evident, despite occasional bursts of activity, which are to some extent the result of growth in the high-tech sector, and the trend substantially slows down in the aftermath of the crisis” (Cavalleri et al., 2019). Figure 14 of their paper shows the fall in start-up rates in OECD countries since the financial crisis. On Italy see Codogno and Galli (2022).
- 6.
https://www.gov.uk/government/publications/autumn-statement-2022-documents. On 17 November the Chancellor said in his statement “the lower interest rates generated by the government’s actions are already benefitting our economy and sound public finances” and “Today’s statement … further reduces the pressure on the Bank to raise interest rates”.
References
Cavalleri, M. et al. (2019). Concentration, market power and dynamism in the euro area. ECB Discussion Paper 2253. Retrieved June 13, 2023, from https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2253~cf7b9d7539.en.pdf
Codogno, L., & Galli, G. (2022). Lessons from Italy’s economic decline. Resolution Foundation / LSE Economy 2030 Inquiry. Retrieved June 13, 2023, from https://economy2030.resolutionfoundation.org/reports/lessons-from-italyseconomic-decline/
Davies, R. (forthcoming). Declining responsiveness and reallocation—Micro data and the UK productivity puzzle. LSE Discussion Paper, Mimeo.
King, M. (2016). The end of alchemy. Little, Brown.
King, M. (2021). Monetary policy in a world of radical uncertainty. Economic Affairs, 42(1), 2–12. https://doi.org/10.1111/ecaf.12513
Volcker, P. A. (2018). Keeping At It. Hachette Book Group.
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King, M. (2023). The Great Repricing: Central Banks and the World Economy. In: Savona, P., Masera, R.S. (eds) Monetary Policy Normalization. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-031-38708-1_3
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DOI: https://doi.org/10.1007/978-3-031-38708-1_3
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