A guest post by Benjamin Cole
The Reserve Bank of Australia (RBA) shoots for an “inflation band” of between 2 percent and 3 percent, and the Aussie economy (as recently illustrated here by Marcus Nunes) has been among the best-performing following the 2008 Great Recession.
Could it be that simple? Should central banks merely shoot for a somewhat flexible and slightly higher inflation target? Worth noting is the People’s Bank of China has overseen much prosperity with a 4 percent inflation target.
While I much prefer nominal GDP level targeting (NGDPLT), and Market Monetarism, as a political-practical matter maybe the Aussie route of an inflation band is “good enough.”
Watch Your Language
Some of the “problem” with Market Monetarism is the English language, especially as used in the blogosphere.
In blogland and major media, currencies become “debased,” and economists advocate “inflation” to reach for prosperity. But that same inflation will inevitably accelerate, gallop and explode, crippling the elderly and poor the most—and reduce paychecks between compensating pay raises.
Not surprisingly, the lay public dislikes inflation.
I have begged Market Monetarists to refer to themselves as “monetary bulls” seeking prosperity and robust economic growth, but the MM language used often allows critics to suggest MM’ers merely want higher rates of inflation—worse, an undefined rate of inflation.
Adding to rhetorical weakness, most MM’ers let the Fed off easy, and do not repeat the meme that the Fed is “suffocating the economy” (when in fact it has been and perhaps still is). The Fed has been feeble and dithering when it should have resolutely targeted robust growth—but you would never know it, even in the MM-blogland. The language has been too obscure.
Or perhaps the righty-tighties are banking their drums too loudly for any other voices to be heard (aside from the federal-deficit spenders).
Back to the Aussies
But the lay public understands inflation, and they can grasp that an “inflation band” means price hikes will not go over 3 percent a year. If the lay public can be convinced that inflation at a little under 3 percent allows prosperity, maybe they will accept moderate inflation.
I suspect with an inflation-band regime of 2 percent to 3 percent, a shrewd central bank can effectively practice MM, much along the lines of past Fed Chairman Alan Greenspan, who was perhaps the ur-MM’er. I liked the 1990s.
The funny thing?
The American and European publics might sign off on RBA-style growth and inflation, but try to get the ECB and the Fed to go along. They are abjectly genuflecting to lower inflation targets, even in the Great Recession.
Well, maybe that is not so funny.