The IMF has prepared a background paper to guide discussions during a high-level conference on April 13:
The global financial crisis shook monetary policy in advanced economies out of the almost complacent routine into which it had settled since Paul Volcker’s Fed beat inflation in the United States in the early 1980s.
Our new paper, co-authored with other IMF staff, takes stock of where the debate stands, and provides a launching pad for further research and reflection. While not the first effort of its kind, this latest work shows just how much momentum the rethinking has gained, with a vast volume of new work by academics and central banks in just the last two or three years. We’ve invited policymakers, academics, and media from around the world to a high- level conference on April 13 during the Spring Meetings of the World Bank and IMF to give this broad group of stakeholders a further opportunity for discussion.
Long-term price stability has been a primary objective of monetary policy for many years, and our review found no good reason why this should change. Low and stable inflation makes it easier for households and businesses to plan, and allows the economy to operate efficiently. But the crisis has shown that this is not enough: dangerous financial imbalances can brew under the apparently tranquil surface of low and stable inflation.
It´s a pity the focus remains on long-term price stability. They see no good reason to change that even if “dangerous financial imbalances can brew under the apparently tranquil surface of low and stable inflation”.
My view is that “dangerous financial imbalances” can brew under any “surface”, be they more or less tranquil. Or didn´t the heavy handed interference of government policy in the housing market to promote homeownership (which rose from less than 64% to almost 70% between 1994 and 2006 (see chart)) had no effect on events?
The IMF could have taken the opportunity to enlarge the ‘discussion set’, in particular expand the concept of long-term price stability to encompass long-term nominal stability.
This has been proposed by some ‘high priests’ of the profession (see here and here, for example), so it cannot be viewed as a ‘fringe movement’ spearheaded by some ‘crazy mavericks’ (here, for example).
But we have been shown by events that even nominal stability is not enough. No one can question the fact that over the past 4 years (since 2010) nominal spending growth (NGDP growth) has not been stable or that inflation has not been low. But business and households have had a hard time planning and the economy is certainly not operating efficiently.
That´s where the ‘level’ in NGDP targeting, level targeting comes in. With level targeting what you do is avoid getting stuck-in-a-slump, thus remaining depressed, as the chart illustrates. But instead of objectively discussing a change in the monetary policy framework that would be effective in getting the economy back on the right track, what we see are efforts to explain (or even justify) why being “stuck-in-a-slump“ (Secular Stagnation) is the” new normal”! Very sad.