Nobel Economics Laureate Professor Stiglitz Points Out Contractionary Policy Backfire "It Can Stimulate Prices"

[Photo by Reuters Yonhap News]

[Asia Economy Reporter Byunghee Park] Joseph Stiglitz, a professor at Columbia University in the United States who won the Nobel Prize in Economics in 2001, warned that the central bank's tightening measures could ironically worsen inflation.

According to Bloomberg on the 24th (local time), Professor Stiglitz argued that the central bank's aggressive interest rate hikes could increase inflation risks from the supply side.

To stabilize prices, either demand must be suppressed or supply increased, but raising the benchmark interest rate is only a demand suppression measure, Stiglitz pointed out. He also warned that interest rate hikes could instead shrink supply.

Professor Stiglitz said, "Raising the benchmark interest rate does not solve problems on the supply side," adding, "It is right to make more investments to resolve current supply chain issues, but if raising the benchmark interest rate makes supply chain investment more difficult, the inflation situation could worsen."

He also noted that in some countries like the United States, companies show clear signs of market power that allows them to raise prices without suffering business losses, and in such situations, raising the benchmark interest rate could stimulate price increases.

Regarding the U.S. housing market, Professor Stiglitz said that landowners are raising rents and passing the cost burden onto tenants, which could also fuel inflation.

He pointed out, "Will raising the benchmark interest rate increase food and energy supply and solve supply chain problems? Not at all." He also criticized, "Central bank policymakers do not try to find the root of the problem," adding, "The real problem is that raising the benchmark interest rate will make the situation worse."

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