A costly misunderstanding

Well expressed by Paul Krugman, who writes:

There is good reason to believe that the conventional 2 percent inflation target is too low, even for the United States; the risks of hitting the zero lower bound are clearly much higher than people believed when 2 percent became orthodoxy.

The risk of hitting the ZLB is not due to the particular target level, but flows directly from central bank´s ‘mismanagement’ of monetary policy and letting NGDP growth tank.

Also, central banks all over are not even hitting their “low” inflation targets, and that´s not because of some “liquidity trap” situation, but because NGDP growth has been constrained to be too low.

The charts illustrate.

While before the crisis NGDP growth chugged along at 5.5%, for the past five years it has clocked just 3.8% (and that means the LEVEL of spending is much lower than previously).

Costly Misunderstanding_1

Before the crisis, unemployment was falling and inflation was “on target”, averaging 2.1%. For the past five years, unemployment has fallen significantly, but inflation has averaged only 1.5% (and may go lower, given that NGDP growth is ‘slipping’).

Costly Misunderstanding_2

When Yellen alludes to China, oil and commodity prices, the exchange rate of the dollar and whatnot to “explain” the (temporarily) low inflation, she demonstrates that the FOMC is clueless about the true causes of “lowflation” and low growth. In reality, all those “facts” are in no small measure a consequence of too tight US monetary policy, as indicated, not by the particular level of the FF rate but by the low level and low growth of total nominal spending (NGDP).

As market monetarists have been saying for a long time, Stop Talking About Inflation.

One thought on “A costly misunderstanding

  1. The unemployment rate hit 4.5% in the 1990s. How about the Fed has a hard numerical ceiling of 4.5% on unemployment and a “whatever” on inflation.
    Might work better.

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