You know about the Fed's 2% target for inflation. Since 2012 I think, that's been the official target.
Thomas Palley, in 1996, in The Atlantic, wrote:
most economists support policies of zero inflation achieved by high real interest rates
Myself, I'm no economist. But I think economists should be embarrassed to support any inflation other than zero. I think they should see the call for 2% as an admission of failure -- a failure of policy, and of the theory behind it.
Anyway, it occurs to me that using high real interest rates to achieve an inflation target has the unintended consequence of increasing aggregate financial costs to the economy. Let's say unintended.
Imagine an alternative way to fight inflation. If we design and implement tax policy to encourage the accelerated repayment of debt, we have a new way to limit aggregate demand. But the new policy includes the intentional consequence of reducing aggregate financial costs to the economy. It may not seem that way now, because private debt remains at such a high level. But as the new policy pushes down debt-to-everything-else ratios, the effect will soon become clear.
4 comments:
"it occurs to me that using high real interest rates to achieve an inflation target has the unintended consequence of increasing aggregate financial costs to the economy."
If high Fed fund rate causes low inflation and low Fed fund
creates high inflation, then how come 8 years of the lowest
Fed fund rate has mot produced extremely high inflation?
Instead we find the lowest inflation in nearly 50 years?
Do you not care that the stories that you have been quoting so frequently do not square with the observable facts?
Interest rates don't cause inflation. Spending causes inflation, but only demand-pull inflation. Rising costs as with oil or finance cause cost-push inflation. Expectations may cause inflation, but are more likely to keep it going than to get it started.
The slow growth of spending for the past 8 years, along with slow growth of debt and low interest rates, explain a good part of why inflation remained low.
"Do you not care.."
I am aware that the onset of financial crisis creates a break with the past, so that stories which ring true for a lifetime suddenly are true only for the "normal" economy and not for the "crisis" economy.
To my way of thinking, to correctly understand the normal economy is the important task because the crisis arises in the normal economy.
To think of the crisis economy as normal is most certainly wrong.
As far as I can see the story has never had a ring of truth.
Lets turn the question around:
If a high Fed fund rate causes low inflation then how come
40 years ago when the Fed rate was at its highest level inflation was very high?
"Lets turn the question around:
If a high Fed fund rate causes low inflation then how come
40 years ago when the Fed rate was at its highest level inflation was very high?"
You turned the question around the wrong way. You should ask
If a high Fed fund rate causes low inflation then how come
40 years ago when inflation was very high, the Fed rate was at its highest level?
The answer then is obvious: because "a high Fed fund rate causes low inflation".
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