Why controlling inflation is important

Roberto Steiner. Member of the Board of Directors. Bibiana Taboada. Mauricio Villamizar. Jaime Jaramillo-Vallejo. Alberto Carrasquilla. Art Museums Musical activity at Banrep Museos de arte La actividad musical del Banrep Study Programs Abroad.

We are frequently in search of However, the reduction in inflation may increase future profits and reduce interest rates - which is good for the market. Therefore, the stock market response to the announcement of a policy directed at reducing inflation measures whether the good effects of reducing inflation outweigh the bad.

Henry constructed a database of 81 different episodes of inflation in 21 emerging economies, such as Chile, Argentina, Indonesia, and Mexico, over a year period ending in He identified 25 episodes where inflation was greater than 40 percent.

The median inflation rate among those episodes was percent. In the moderate group of inflation episodes he examined, the median rate was 15 percent. Henry found that when countries tried to stabilize high inflation, the stock market increased by 24 percent on average. In other words, reducing high inflation has a large positive effect on the stock market.

In contrast, he discovered that reducing moderate inflation had no significant effect on the stock market. In other words, a positive stock market response to inflation stabilization predicts lower inflation and faster economic growth in the future and vice versa. The United States does not suffer the walloping inflation rates that plague emerging markets.

The most dramatic cases of expectation-setting, however, are in emerging economies. Explore Blog Reference library Collections Shop. Share: Facebook Twitter Email Print page. These are ways of controlling inflation in the medium term i. A reduction in company taxes to encourage greater investment ii. A reduction in taxes which increases risk-taking and incentives to work — a cut in income taxes can be considered both a fiscal and a supply-side policy iii.

If they have less to lend, consumers will borrow less, which will decrease spending. The third method is to directly or indirectly reduce the money supply by enacting policies that encourage the reduction of the money supply. Two examples of this include calling in debts that are owed to the government and increasing the interest paid on bonds so that more investors will buy them. The latter policy raises the exchange rate of the currency due to higher demand through capital inflows if your rates are increasing relative to foreign rates and, in turn, increases imports and decreases exports.

Bureau of Labor Statistics. Federal Reserve Bank of St. Federal Reserve. Fiscal Policy. International Markets. Interest Rates. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses.