Inflation Targeting, Committment and Expectations: A Belated Account of Robert Hall's View

Way back in grad school I found Krugman's idea of inflation targeting in the context of Japan really interesting.  And so I blogged a bit about this--and particularly Krugman's relative silence on the subject--way back at the beginning of this Little Depression.

Krugman and others have been writing more about it.  Scott Sumner probably takes the prize for vigilance.  Of course now it seems too little too late.

Krugman's recent blog post is a nice one.  I, for one, just cannot understand why the likes of Volcker doesn't get this.

Anyway, all this has me recalling the keynote lecture by Robert Hall at this past summer's AAEA meetings.  He seemed to get the basic economics right (as he obviously should) and talked about some interesting ideas, like moving from an income tax toward a consumption tax as a way to spur spending.  The essential underlying motive to spend more in the present is a lot like inflation targeting.  And some aspects of a consumption tax do make sense to me. But he didn't mention inflation targeting.

So I asked him in the Q&A about inflation targeting and why the Fed wasn't at least attempting it.  His answer completely stumped me:  He said, in effect, that if the Fed were to target inflation it might not work, and if it didn't work, then everyone would lose faith in the Fed, and that would then hurt efficacy of the Fed's actions going forward.  In other words, they shouldn't try to be effective because then they might lose effectiveness.

That was a new and--to my mind--strange line of reasoning.  I thought I had understood pretty well the commitment/expectations challenge with inflation targeting--that this was mainly about the Fed having the independence and will to follow through on any announcement it might make.  If we could take Fed independence as granted, then I see no great challenge here:  the Fed would stick to it commitment so as to remain credible in the future.  And besides, keeping a higher target is probably better for long-run growth anyhow, or at least better insurance against hitting the zero lower bound in another crisis.

The problem, I suspect, is that the Fed fears it will lose its independence if it sets explicit inflation targets.

It is bizarre and sad how history and economic study have given a long menu of tools to cope with the depressed economies of the developed world while policy makers seem hopelessly compelled to try none of them.


  1. Michael,
    Targeting a higher rate of inflation would indeed make sense for this economy, but "inflation" is a dirty word to many, including academic economists who came of age during the stagflation of the 1970s, and the general public as well, especially those on "fixed incomes" who are net creditors instead of borrowers. Inflation is a transfer from current borrowers to current creditors, so it is something of a class issue as well, as Krugman has highlighted on occasion.

    Given this it would have been surprising if the Hoover Institution's Hall (or Volcker) would voice any sympathy to the idea of targeting inflation at a higher level.


  2. Sorry - meant to write that inflation represents a transfer from creditors to borrowers.


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