Sunday, August 7, 2011

Time to Cash in the Fed's "Credibility"?

Ezra Klein talks to Ken Rogoff:
Since 2008, Rogoff has recommended that the Federal Reserve commit to an extended period in which it will seek to set inflation at 4 percent. That would effectively make debt worth less. That’s anathema to central banks, which have spent the past few decades building their credibility as inflation fighters. But Rogoff is unimpressed. “All the central banks of the world have been fighting the last war,” he says. “This is a once-every-75-years great contraction where you spend your credibility. This is what that credibility is for.”
Update (8/12): Rogoff explains his thinking more in this FT column.

3 comments:

The Arthurian said...

I am unimpressed.

If we didn't have inflation all the while we were accumulating debt, Rogoff could be right. But we did. So there must be something wrong with the notion of inflating more to solve the debt problem.

The natural solution, now, is deflation. But why not split the difference and reduce debt while at least aiming to keep prices stable?

We don't have any policies that encourage the reduction of debt. Such policies should be our primary weapon against inflation when times are good. But we prefer to suppress inflation by suppressing growth.

Anyway, the Fed has been trying to inflate without success, I think because the economy is not growing anywhere near fast enough for that to work. But if it ever does grow enough that easy money again causes inflation, private sector debt will once again be growing faster than all else, making the problem worse.

Bill, you as an economist should be outraged that anyone is even suggesting to use inflation as an economic policy tool.

Art

Bill C said...

Not sure I agree with Rogoff, but I'm not sure I don't. That would reduce the real value of debt, but it would also have a lasting effect on expectations. Its certainly interesting to hear such suggestions from the former chief economist of the IMF, of all people.

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