Avoidable complications

This is the sort of proposal that tries to emulate the complications of the “tax code”. Reminds me of Mr. Francisco Lopes who in early 1999 was Brazilian Central Bank President for a few days. Instead of letting the exchange rate float (as came to pass a few days later), he introduced a “fluctuation band” for the exchange rate which he named “diagonal endogenous band”!

From MacroAdvisers: Is the Fed too obsessed with inflation? A proposal for a new FOMC regime.

When the Chairman discusses the FOMC’s medium-term inflation objective, we suspect that many in the market interpret him as saying that the inflation goal is also a near-term objective. This interpretation undermines the FOMC’s ability to ease under current circumstances.

A key issue is providing clarity on how tolerant the FOMC is, or should be, about short-run departures of core inflation from 2%. We propose a new policy regime, called monitoring-range inflation targeting (MRIT, pronounced “merit”) that provides such clarity.

I bet not many will have the stomach to read to the end, So here is the Bottom Line:

We proposed a new regime for the FOMC, which we called monitoring-range inflation targeting (MRIT). Under MRIT, the FOMC would announce an explicit medium-term target for headline inflation and a short-term monitoring range for expected core inflation. A key benefit of MRIT is that it would reinforce the FOMC’s commitment to price stability over the medium term while also giving the Committee some room to provide additional stimulus over the short run. We believe that MRIT dominates other easing options that are currently under consideration. In addition, MRIT could easily become a permanent new regime for the Committee and not just another emergency action taken to address the aftermath of the Great Recession. A main challenge with adopting MRIT is the risk that it might unsettle longer-term inflation expectations. This is a communication challenge that, we believe, could be handled by Chairman Bernanke. At any rate, other potentially effective easing actions currently on the table would present even greater communication challenges.

Yes, the Fed is obsessed with inflation, but “MERIT” would obsess the whole nation!

So my guess is that “MERIT”, if enacted, would have a very short life indeed!

2 thoughts on “Avoidable complications

  1. There is no merit to MRIT…very odd indeed. If they want to stay with in the inflation targeting style regime why not just suggest that the Fed target a price level?

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