Maybe John Cochrane had “too much to drink”

Before his presentation at the Hoover Institution Conference organized by John Taylor:

(Reuters) – The U.S. Federal Reserve does not have the power to fight inflation on its own, a prominent economist said on Thursday, a conclusion that challenges the very bedrock of current Fed thinking.

“Inflation is always and everywhere a fiscal problem,” declared John Cochrane, a professor at the University of Chicago, speaking at Stanford University’s Hoover Institution. “Long-run price stability is a function of the structure of government debt, fiscal promises, and fiscal commitments. The central bank has only a short-run smoothing role, as it did under the gold standard.”


To Cochrane, inflation targeting is actually a “fiscal promise” to raise taxes or to cut spending should inflation rise too fast.

Indeed, he said, the Fed’s success in defeating runaway inflation under Fed Chair Paul Volcker during the 1980s was only possible because of cooperation from fiscal authorities.

That last got me completely lost! Just look at the chart that puts the fiscal deficit during the first half of the 1980s together with Core PCE inflation.


A Martian landing on earth around 1982/83 would take back with him the idea that if you want to defeat inflation have the fiscal authorities crank up the deficit!

And who´s worried about the Fed´s “incapacity to fight” inflation at the present time? In truth it is becoming consensus that the Fed has the economy exactly where it wants! And that has happened with the deficit balooning  in 2007-09 and contracting significantly since mid-2012.

PS Are they (Lacker, Plosser, Williams & Geoge) laughing at Cochrane? Or just in desperation?


One thought on “Maybe John Cochrane had “too much to drink”

  1. The central bank and fiat money are just bit-part actors in the inflation picture? And Reagan’s huge deficits beat inflation?
    What next? I am stupified at Cochrane…

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