Comments on: Kenneth Rogoff Embraces Inflation

By: work and travel

work and travel — Thu, 25 Dec 2008 00:07:34 +0000

Is there any information about this subject in other languages?

By: James Kwak

James Kwak — Fri, 05 Dec 2008 16:28:05 +0000

I think there is some voodoo hear, but it counteracts one form of irrational behavior by homeowners. Homeowners are very bad at recognizing that the actual value of their houses has fallen and selling at a market price. Instead, they put their homes on the market at more than they can sell for, which slows adjustment. Inflation has the benefit in this context of making the prices that people have in their heads realistic market prices and unsticking the market.

There is also a very real effect, which is that inflation will reduce the real value of the mortgage debt that is such a weight on so many households.

By: eRobin

eRobin — Fri, 05 Dec 2008 16:19:35 +0000

That brings us back to the inflation option. In addition to tempering debt problems, a short burst of moderate inflation would reduce the real (inflation-adjusted) value of residential real estate, making it easier for that market to stabilise. Absent significant inflation, nominal house prices probably need to fall another 15% in the US, and more in Spain, the UK and many other countries. If inflation rises, nominal house prices don’t need to fall as much.

Isn’t this voodoo counting on the wealth effect more than the actual value of money? Or is that the point?