tag:blogger.com,1999:blog-2546602206734889307.post7910157745524187696..comments2024-03-19T05:54:16.651+00:00Comments on mainly macro: Is there a case for inflation targets? The UK versus the US.Mainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-2546602206734889307.post-80025364235135245962013-01-13T09:44:02.659+00:002013-01-13T09:44:02.659+00:001. Playing with inflation simply can be useful in ...1. Playing with inflation simply can be useful in certain situations (getting the air out of an asset bubble for instance). It is a good mechanism herefor better imho than QE as it does it in a more natural way. In the sense that after the 'act' price level is in a 'natural' equil. and not in an inflated one like with QE.<br />Anyway flexibility in general is a very useful tool if you want to obtain certain objectives.<br /><br />2. By using the words: 'maximising social welfare' however you come on political surface. Which opens questions about the democratic legitimacy of CBs and its decisions.<br />As at the other hand powers were moved to CBs as politics made a mess of it, a good balance between the 2 should be found.<br /><br />3. It looks a recent trend that governments want again more influence on CBs policies. Reason probably mainly that politics doesnot get away so easy with decisions of other non-elected bodies anymore. It has simply become more difficult to blaim the EU or the CB if things remain substandard.<br /><br />4. Markets most likely prefer for most stuff standards as it gives more certainty. For very unusual situations (the not earlier considered) they simply want a solution and a quick one, even if it fits in the overall system is hardly important at that point.<br /><br />In how far it is possibile and benificial will mainly depend if a proper balance can be found between the above aspects.<br />I could imagine a split in long term and shorter term objectives and try as much as possible to keep the social stuff out. The more social consequences choices have the more likely politics want a say (whether that is positive is another issue).<br />Anyway a system with checks and balances works in general best in the public domain on important functions (and CBing is simply one of those). Riknoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-55164180961857541322013-01-09T17:47:31.943+00:002013-01-09T17:47:31.943+00:00Might it not also have meant that there would hav...Might it not also have meant that there would have been a recession anyway, just one with more inflation ?Ron Ronsonnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-15872258524926919612013-01-09T14:53:56.149+00:002013-01-09T14:53:56.149+00:00Nice post; a couple of comments:
1. You say the B...Nice post; a couple of comments:<br /><br />1. You say the BoE are forecasting a -ve output gap, but the BoE don't actually publish a specific forecast for the output gap. Mostly MPC members have been saying that they don't think it likely that faster demand growth in the short run will increase output.<br /><br />2. The discussion of flexible targets is very interesting. If you look at the BoE's inflation forecasts over the last few years, there are periods when they are expecting inflation to fall well below 2% on the two year horizon or beyond. Early 2009 and late 2011 in particular. There are no periods in which they expect inflation to exceed the 2% target on a 2 or 3 year horizon since early 2008.<br /><br />I find it hard to agree that the BoE lacks target flexibility on that basis. They are flexible but only in the wrong direction, sadly. <br />Britmousenoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-92175160601102887052013-01-09T13:31:44.985+00:002013-01-09T13:31:44.985+00:00Good post. I was sitting on the fence (for Canada)...Good post. I was sitting on the fence (for Canada) just like you, around a year ago.<br /><br />"I also suspect that many macroeconomists have traditionally assumed (as I did) that the costs of inflation targeting were small, because if that target was achieved flexibly, it was quite compatible with optimising some combination of inflation and the output gap."<br /><br />Yep. That was me. I thought that if the BoC was successful in keeping inflation on target, at around a 2 year horizon (not each and every month), then it would also be successful at preventing recessions. Well, it turned out the BoC came very close to success on the first measure, but failed on the second measure. I was wrong. There was a recession, and NGDP fell well below trend path at the same time. That very strongly suggests that if the BoC had been targeting NGDP level path, rather than inflation, there would have been a much smaller recession, if any.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-86039373343264937202013-01-09T10:07:07.893+00:002013-01-09T10:07:07.893+00:00Before asking the question: what should be the aim...Before asking the question: what should be the aim of monetary policy? one should ask the question: what should be the aim of economic policy? Remember, monetary policy is just one component of economic policy. Other components are fiscal policy, international trade policy, competition policy, etc.<br /><br />Many if not most economists, especially macroeconomists, argue as if overall economic policy is synonomous with monetary policy. The whole NGDP debate is actually a debate about economic policy. <br /><br />Over the past 3 decades, economists have been able to identify the responsibility of monetary policy within the broader economic policy sphere. It can be summarised as: price stability and financial stability taking cognisance of the broader economic environment. Exactly how this is achieved is still being debated, but I support targets with some level of flexibility.<br /><br />Why is there no such explicit statement of responsibilities (and associated targets) for fiscal policy, international economic policy, competition policy, etc??<br /><br />The efficacy of monetary policy actions has been severely decreased since they has to take up the slack from the failure of fiscal policy. Indeed, the failure of competition policy has created the TBTF banks that compromise financial stability.Oupootnoreply@blogger.com