{"id":408929,"date":"2010-03-09T13:11:58","date_gmt":"2010-03-09T18:11:58","guid":{"rendered":"tag:www.economist.com,21005269"},"modified":"2010-03-09T13:11:58","modified_gmt":"2010-03-09T18:11:58","slug":"moving-targets","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/408929","title":{"rendered":"Moving targets"},"content":{"rendered":"

LAST month I spent<\/a> some<\/a> time<\/a> musing on the ups and downs to a 4% inflation target\u2014a policy which IMF chief economist Olivier Blanchard recently suggested should get some consideration, given the speed with which central banks hit the zero lower bound in the most recent recession. A higher target would typically give central banks more room to cut rates, and it might have other ancillary benefits, like improving the adjustment of real wages. On the other hand, a higher target might make inflation more volatile, and it’s worth asking whether the costs would be worth the benefits given the rarity of extremely severe crises.<\/p>\n

At Vox today, IMF economist Daniel Leigh weighs in<\/a> on the debate, examining the hypothetical effect of a 4% inflation target during Japan’s Lost Decade. He concludes that a higher target might have cut Japan’s output loss in half, which would seem to provide strong support for an increase. But Mr Leigh’s explanation of his work offers some interesting context to this finding:<\/p>\n

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Second, counterfactual simulations suggest that an inflation target of 4% would have allowed the Bank of Japan to avoid the zero lower bound on nominal interest rates. But merely having more room for rate cuts would not have yielded much improvement in output performance. Without a strong output-stabilisation objective, the additional margin for interest rate cuts would not have been fully used. The higher inflation target raises inflation expectations in this model, but the associated improvement in output is short-lived…<\/p>\n

[T]here is evidence that a policy that combines a higher inflation target with a vigorous response to output would have substantially improved the economy\u2019s performance. In particular, the simulation results suggest that such a policy would have reduced Japan\u2019s output losses during the \u201cLost Decade\u201d by half…<\/p>\n<\/blockquote>\n

But this immediately raises another question. Mr Leigh argues that a higher target alone would not have much reduced Japan’s losses. A higher target with an aggressive output-targeting regime would have cut losses in half. How much would losses have been cut given a 2% target and an aggressive output-targeting regime? In other words, how much of the work is the higher target actually doing?<\/p>\n

After all, and as Ben Bernanke himself has acknowledged<\/a>, the zero bound did not prevent the Fed from taking additional action. Had the Fed attempted to increase long-run inflation expectations, it could have continued to push down real interest rates. The point of the inflation target, to a certain extent, is that central bankers are simply reluctant to deploy extraordinary measures, and so monetary policy will be more fully utilised if they have more room to cut before facing the need to deploy those extraordinary measures. But if central bankers have a firm commitment to an output target, then they’ll be less likely to blink at the zero bound.<\/p>\n","protected":false},"excerpt":{"rendered":"

LAST month I spent some time musing on the ups and downs to a 4% inflation target\u2014a policy which IMF chief economist Olivier Blanchard recently suggested should get some consideration, given the speed with which central banks hit the zero lower bound in the most recent recession. A higher target would typically give central banks […]<\/p>\n","protected":false},"author":4534,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-408929","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/408929","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/4534"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=408929"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/408929\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=408929"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=408929"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=408929"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}