The IMF's Inflation Illusion |
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March 4, 2010
The International Monetary Fund's chief economist, Olivier Blanchard, recently published a paper ("Rethinking Macroeconomic Policy") that attempts to distill preliminary lessons from the financial crisis. The paper contains much that is useful and worthy of further consideration—but it also suggests that central banks should aim for higher inflation during normal times, say 4%.
The International Monetary Fund's chief economist, Olivier Blanchard, recently published a paper ("Rethinking Macroeconomic Policy") that attempts to distill preliminary lessons from the financial crisis. The paper contains much that is useful and worthy of further consideration—but it also suggests that central banks should aim for higher inflation during normal times, say 4%.
Such an inflation target, the argument goes, would lead to higher nominal interest rates and therefore give more room for monetary policy to be eased during times of crisis. This argument is severely flawed and its timing highly unfortunate, if not imprudent.
The basic assumption behind the suggestion of a higher target inflation rate is simply wrong. As the recent crisis has vividly illustrated, monetary policy is not powerless once the short-term interest rate is close to zero. The Bundesbank and the Swiss National Bank have argued for some time that short-term interest rates are not the only means by which monetary policy effect the economy. "Unconventional" measures, such as longer-term refinancing opportunities, liquidity facilities and asset purchases have been effective in further stimulating the economy.
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