Finally we have direct talk of inflation targeting

While I'm no macroeconomist, I've read a lot of good macroeconomists, and this has made me question why explicit inflation targeting backed by unconventional monetary policy was not on the table like six months ago.

Better late than never. Here are excerpts from the story at Bloomberg.
What the U.S. economy may need is a dose of good old-fashioned inflation.

So say economists including Gregory Mankiw, former White House adviser, and Kenneth Rogoff, who was chief economist at the International Monetary Fund. They argue that a looser rein on inflation would make it easier for debt-strapped consumers and governments to meet their obligations. It might also help the economy by encouraging Americans to spend now rather than later when prices go up.

“I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.” ...

....Even after all the Fed has done to stimulate the economy, some economists argue that it needs to do more and deliberately aim for much faster inflation that would also lift wages.

With unemployment at a 25-year high of 8.9 percent.... Wages and salaries rose 0.3 percent in the first quarter, the least on record...

In advocating that the Fed commit itself to generating some inflation, Mankiw, 51, likens such a step to the U.S. decision to abandon the gold standard in 1933, which freed policy makers to fight the Depression

I predict: rational expectations macro will die a slow death and we will have a revival of monetarist vs. Keynesian debate. This debate has been bubbling beneath the surface but it hasn't been in sharp focus. I think that is about to change. The center of the debate will concern the optimal balance of fiscal policy and inflation targeting backed by unconventional monetary policy when faced with a liquidity trap.

Update: Up until now the debate has seemed unfocused and scattered because some sides seem wedded to vanquished ideas. There are the Libertarian types who seem split between the Andrew Mellon liquidationists who believe government should do nothing except watch the bankruptcies unfold (and maybe go back to the gold standard) and the Friedman monetarists, who seem to believe monetary policy and perhaps small regulatory changes are all that's needed, but often slip into saying fiscal stimulus is counterproductive. Then there are new Keynesians who seem to think there should be both fiscal and monetary stimulus, but don't write much about monetary policy, and have been mum about inflation targeting. Nevertheless, I think the Keynesians strongly support new, unconventional monetary policy and inflation targeting.

Even if we ignore the liquidationists, too much of the debate is about silly ideas, like fiscal stimulus being counterproductive. I think you can be against fiscal stimulus without saying it is counterproductive. The argument would be that more vigorous monetary policy coupled with an explicit inflation target might be enough, and thereby make fiscal stimulus unnecessary. This may be a tough sell, but the Fed policy, while vigorous, has fallen far short of the kind of inflation targeting proposed by Rogoff. Then the Keynesians would have to retort with more nuanced arguments about the optimal balance of fiscal and monetary policy. Instead, the left spends all their time pointing and shrilling at the crazy claims made from the right.

If leading thinkers on both sides, from Mankiw-Romer types on the right to Krugman-Delong types on the left, all think inflation targeting is a good idea, then they should be saying so loud and clear.


  1. Inflation is fought by the federal reserve raising interest rates, in order to increase unemployment, leading to less inflation. This has been the cause of most or all previous recessions since the great depression. When unemployment got too bad, the fed was able to lower interest rates, reversing this.

    This recession has different causes - shifting of wealth upwards to a small group.

    The last thing the government needs to be doing right now is deliberately cause more unemployment.


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