Long-Run Inflation in a Monetary Union
A finance minister in a Eurozone member country, facing pressure to reduce the national debt, proposes a new domestic policy. The minister claims this policy will stimulate the national economy to such a degree that the country can sustain a long-run inflation rate of 4%, even though the European Central Bank's (ECB) official inflation target for the entire Eurozone is 2%. The minister argues this higher inflation will help erode the real value of the government's debt over time.
Analyze the fundamental flaw in the minister's long-run economic reasoning, based on the relationship between a member country's inflation and the central bank's target in a shared currency area.
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