The Fed did not have enough room to cut interest rates before hitting the zero lower bound when the recession hit. Raising the target inflation rate, which would increase average interest rates and give the Fed more space for rate cuts, is something the Fed ought to seriously consider.He's not quite as blunt as I might like, but he's saying that, if a central bank wants to hit a higher inflation target, it has to set nominal interest rates higher, on average. So, in the course of transitioning to a higher inflation target, the central bank must, at some time, have to raise nominal interest rates in order to produce higher inflation. But then, it must be true that, if the central bank has an inflation target of x%, and inflation is persistently y%, where y < x, then the central bank must raise its nominal interest rate target.
Friday, August 26, 2016
We are All Neo-Fisherites
I was looking at this piece by Mark Thoma on increasing the inflation target. In some discussions of this issue, people seem to have a hard time getting to the core of the argument, but Mark does not. He has a good discussion of the Fisher effect, and his concluding paragraph is: