Emergent Order

Percunia Ante Homines

Inflation Targets

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My thanks to Brad Delong for pointing this out:

During the confirmation hearings of Fed Chairman Bernanke, a series of questions were drawn from the Wall Street Journals Real Time Economics was put to the chairman by Senator David Vitter. My was the following:

D. Brad Delong, University of California at Berkeley and blogger: Why haven’t you adopted a 3% per year inflation target?

The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.

Personally I would have followed this question with the following:

  1. Is the american public so fundamentally different from New Zealand, Britain, or the EU that an explicit inflation target could have such an effect.
  2. Are you not asking the public to have faith that  short run pressures from congress will not cause you to give in to pressures to adopt policy with long run instability implications (which you and your predecessors have always given in to).

Written by weso

December 18, 2009 at 05:45

Posted in Uncategorized

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