Tuesday, February 16, 2010

Move That Target?

One of the lessons of the global recession may be that central banks should target a higher level of inflation in normal times, says the IMF's Olivier Blanchard:
As a matter of logic, higher average inflation and thus higher average nominal interest rates before the crisis would have given more room for monetary policy to be eased during the crisis and would have resulted in less deterioration of fiscal positions. What we need to think about now if whether this could justify setting a higher inflation target in the future.
Hmmm... like I said two years ago.

Paul Krugman approves: "I’m not that surprised that Olivier should think that; I am, however, somewhat surprised that the IMF is letting him say that under its auspices. In any case, I very much agree." Free Exchange explores the idea further.

As I discussed here, one of the difficulties in raising inflation targets would be maintaining monetary policy credibility in the face of doubts that such a shift would simply be a disguised means of using inflation to diminish the real value of debt.

Update: The Atlanta Fed's Dave Altig is skeptical.

1 comment:

Anonymous said...

nice post. thanks.