Discuss the view that price stability should always take priority over other macroeconomic objectives

Why price stability should take priority

·     Importance of price stability in an economy

o   Keeps exports competitive 

o   Maintain high purchasing power and therefore high SOL

o   Avoids destabilising effect of high inflation

·     Achieving price stability can also help with other macroeconomics objectives

o  If exports become more competitive -> (X-M) will increase -> increase in AD -> real national income increase -> higher economic growth & lower unemployment

§ BOP can improve as a result

o  Country with price stability may also be attractive to investors as they can be certain of their profit margins -> Increase in I -> increase in AD -> real national income increases -> higher economic growth & lower unemployment.

§ Improvement in Capital Account -> Improvement in BOP

Why other objectives should take priority 

·     Importance of achieving sustained economic growth

o  Higher purchasing power allows for higher SOL

o  More tools (due to higher tax revenues collected) at government’s disposal to solve myriad of economic problems.

o  Policies to achieve sustained economic growth can be done without conflicting with other objectives.

§ Eg EFP/EMP -> increases output -> firms hire more factor inputs including labour -> fall in unemployment 

§ Increased government spending with supply side intent e.g. to increase infrastructure spending such as transport -> can increase AS therefore reducing demand pull inflation

·     Importance of achieving low unemployment

o  High unemployment comes with significant costs e.g. fiscal costs, social costs

o  Unemployment is an inefficient use of scarce labour resources

·     Importance of achieving healthy BOP

o  Healthy BOP indicates healthy current account & capital account which reflects certain state of the economy

o  BOP surpluses allows country to accumulate foreign reserves which is essential to conduct exchange rate policy.

Conclusion

o  Price stability is an important objective, but others cannot be ignored as well.

o  Whether it should take priority will depend on the current status of the economy.