The “Higher Inflation Target” Dead-end

A couple of weeks ago I wrote commenting on Krugman´s paper – suggesting the need for a higher inflation target – to be presented at the ECB Sintra Conference:

It´s a waste of time because it is the wrong product to the wrong customers at the wrong time!

Lo and behold, this was Draghi´s response at the Conference:

Try telling that to Germany. “What would it mean for a German, for example, to have a 5% objective in the whole of the euro area?” Mr. Draghi asked later Tuesday. “I don’t even want to think [about] that.”

But to some, like Edward Lambert:

I think that higher inflation targets is a solution for some who cannot accept the dynamics of the Fisher effect where inflation is low due to low nominal rates from the central banks.

Mario Draghi needs to think about the Fisher effect instead of higher inflation targets.

Nothing like a ‘lesser depression’ to mess people´s head!

On the “Fischer effect controversy” see this Josh Hendrickson post:

There is an important lesson to be learned from this controversy and debate. The lesson is that even though policy is conducted with the federal funds rate as an intermediate target or with interest on reserves as an instrument, it is still necessary to know the underlying path of the money supply associated with this interest rate policy.



4 thoughts on “The “Higher Inflation Target” Dead-end

  1. I don’t agree with Krugman, but he’s got gumption for giving them grief according a Bloomberg article

    “The intense resistance of central bankers to regime change even after more than five years at the zero lower bound shows that the kind of policy stasis that afflicted Japan for almost two decades is a more or less universal phenomenon….
    “Krugman argued that too low an inflation (ECCPEMUY) target may be giving European policy makers an excuse not to do more, what he calls a “complacency trap.”
    “As long as prices remain stable, some officials will argue that monetary policy is doing its job, that any remaining economic difficulties must be addressed with structural reform,” Krugman said.
    “And let’s be blunt, there are already visible tendencies toward a similar loss of resolve in Europe, for example declarations by monetary officials that low inflation isn’t really a problem because it’s mainly driven by needed adjustments in debtor nations.”

  2. The ECB is fomenting extremism in Europe. The Fed is asphxiating the USA. The economics profession is diddling around with fragile and meaningless models. And if employed at the Fed, in comfortable sinecures. Let’s blame structural impediments! Then why was drowth in Eorope and the USA more robust in eras of even greater strucural impediments?

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