A non solution

Tony Yates would have central banks insist on a failed strategy:

The practical challenges of devising watertight legal reform to eliminate cash and its near substitutes, both currently invented and yet to be, or to reform them so that a variable negative interest rate can be set, seem like a tall order.

Much easier is simply to raise the inflation target, as suggested previously by Olivier Blanchard, Krugman and others.  Perhaps by 2 percentage points.  To be done when interest rates would otherwise – under the old target – lifted clear enough of the zero bound that the new target can be achieved within a realistic time frame.  And perhaps reviewed at low frequency as evidence on changes in the natural rate accumulates.

And to conclude with a rather woolly argument, though felt keenly myself, higher inflation would be a much easier thing to explain and communicate than innovative, invasive reform of monetary institutions that not all on the econosphere grasp readily.   And being more easily communicable, I conjecture that it would be easier to build a lasting constituency for higher but stable inflation.

A Price-Level-Target or, even better, a Nominal GDP Level Target would do a much better job of avoiding the ZLB. Just imagine the hardship after decades telling people inflation is bad and of central banks targeting low (2%) inflation that they should now accept that higher (4%) inflation is the best way to go!

Central Banks should forget inflation and concentrate instead on providing Nominal Stability in the guise of a stable nominal GDP level target path, much as in fact was obtained for 20 years during Greenspan´s Chairmanship of the Fed.

2 thoughts on “A non solution

  1. Pingback: Escaping the zero bound. NGDP, PLT vs raising the inflation target. | longandvariable

  2. If NGDP targeting brings more prosperity, which I think will, voters won’t care about wiggles in single digit inflation rates.
    The prosperity will annoy some economists, who believe a 0% rate of inflation is a more important goal.

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