The ‘Inflation Targeting’ Trap

This is Simon-Wren Lewis concluding paragraph in a post on the “Liquidity Trap”:

What is missing is the link with inflation targeting. Because textbooks focus on the fiction of money supply targeting when giving their basic account of how monetary policy works, and then mention inflation targeting as a kind of add-on without relating it to the basic model, they fail to point out how a fixed inflation target cuts off this inflation expectations route to recovery. Quantitative Easing (QE) does not change this, because without higher inflation targets any increase in the money supply will not be allowed to be sustained enough to raise inflation. In this way inflation targeting institutionalises the failure of monetary policy that Friedman complained about in the 1930s. Where most of our textbooks fail is in making this clear.

This has forever been the market monetarists view on the dangers of inflation targeting regimes and how targeting the level of NGDP is much more ‘comforting’ and ‘productive’.

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