Why in reality has betting on macroeconomic stability had negative consequences and not contributed to stability?

Until the 1970s, inflation was considered the main enemy of the economy. Many countries experienced catastrophic hyperinflation, although it did not reach extreme levels. Economic instability caused by high or variable inflation was not conducive to attracting investment, which hindered development. This influenced the approach to managing government budget deficits and encouraged the creation of politically independent central banks. These banks deliberately focused on controlling inflation, as economic stability was a key factor for long-term investment.

Despite the victory over inflation, the world economy has become less resilient. The optimistic claims of the past thirty years that price fluctuations had been successfully controlled did not take into account the extreme instability exhibited by economies around the world. Numerous financial crises, including the global crisis of 2008, have left many with debt, bankruptcy and unemployment. An overemphasis on fighting inflation has diverted attention away from employment issues. The pursuit of growth at the expense of flexibility in the labor market has led to precarious jobs, making people worse off. Despite claims that stable prices promote economic growth, measures to reduce inflation have caused only a slow economic recovery since the 1990s, when inflation was thought to have been defeated.

In the early 2000s, Japan's central bank governor Masaru Hayami refused to increase the money supply for fear that doing so could lead to inflation, even though the country was experiencing deflation and falling prices at the time. However, there is no convincing evidence that an increase in inflation will inevitably lead to hyperinflation, or that such a likelihood is likely. No one argues that hyperinflation is desirable or at least acceptable, but it remains debatable whether any inflation is harmful, regardless of its level.

Since the 1980s, free-market economists have been able to convince the world community that economic stability should be accompanied by minimal to no inflation. They argued that inflation was bad for the economy and should be avoided at all costs. An acceptable level of inflation, they argued, was about 1.3%. This was the figure suggested by Stanley Fischer, a former professor at the Massachusetts Institute of Technology and chief economist at the IMF from 1994-2001.

In fact, there is no evidence that low inflation is bad for the economy. Even studies by pro-free-market economists working with organizations such as the University of Chicago or the IMF show that inflation below 8-10% has no effect on economic growth. A number of other studies set the inflation threshold even higher, at 20-40%, which also has no noticeable negative effect on economic growth.

The experience of a number of countries also shows that sufficiently high inflation can coexist with rapid economic growth. Brazil had an average inflation rate of 42% in the 1960s and 1970s, but remained one of the fastest growing economies in the world, with per capita income growth of 4.5% per year. 

During the same period, per capita income in South Korea grew by 7% annually, despite an average annual inflation rate of nearly 20%, well above many Latin American countries. Since 1996, Brazil, having overcome the traumatic stage of high inflation and hyperinflation, began to contain inflation by raising the real interest rate to one of the highest in the world at 10-12% per year. As a result, inflation fell to 7.1% per annum, but economic growth was affected as the increase in per capita income did not exceed 1.3% per annum. 

A similar situation was observed in the Republic of South Africa since 1994, when inflation control became a priority, which also led to an increase in the interest rate to a level comparable to Brazil's.

Conclusion

In conclusion, the low inflation policy seemed intended to create a sustainable and stable economic environment, but in practice has had negative consequences. The excessive focus on controlling inflation has detracted from other important aspects such as employment and the quality of life of people. As a result, even with low inflation, economic growth has been stunted and per capita income has not been able to reach significant heights. 

The experience of countries such as Brazil and South Africa shows that high inflation can coexist with rapid economic development. Thus, the question arises: does a reliance on macroeconomic stability with a focus on low inflation really contribute to a more sustainable world economy? It may well be necessary to reconsider economic policy approaches in the future, given the diversity of factors affecting the real state of the economy.