Saturday, June 11, 2016

Narayan Kocherlakota — The Fed Must Attack Low Inflation

Maintaining inflation near 2 percent is important because it provides consumers and businesses with certainty. It's like a yardstick -- if people are counting on it to be 36 inches long, being an inch short is as bad as being an inch over.
Borrowers and lenders, for example, need to know how much a dollar will be worth when the time comes to pay it back. Below-target inflation punishes borrowers by making it more expensive than expected to pay off their loans.

Persistently low inflation can also lead the public to expect more of the same. This makes interest rates look higher when the effect of inflation is taken into account -- a phenomenon that hurts the Fed's ability to help the economy by lowering rates.
This is completely crazy. Central banks are premised on maintaining low stable inflation.

The problem is not low stable inflation under 2%. This is not causing economic malaise.

The issue is insufficient effective demand. Firms are reticent to invest even at historically low interest rates because of lagging demand for their products.

In addition, the world is experiencing the end of a long commodity bubble as China rebalances and Europe wrestles with the effects of a flawed currency union.

With "experts" like this, we are so screwed.

Bloomberg View
The Fed Must Attack Low Inflation
Narayan Kocherlakota | Lionel W. McKenzie professor of economics at the University of Rochester, and president of the Federal Reserve Bank of Minneapolis from 2009 through 2015


Bob said...

Implement a JG and put people back to work. Increase the bargaining power of labour by pursuing full employment. That should help with the low inflation problem...

Bob said...

For some reason I'm unable to read the Bloomberg article, but I'm sure that is what Kocherla cucaracha is recommending.

Bob said...

There might be something wrong with the link. Please verify.

Tom Hickey said...

Fixed. Thanks.

Ralph Musgrave said...

Kockerlakota doesn’t give any FUNDAMENTAL reason for inflation being 2% rather than 0%, minus 3% or any other figure. He just argues that 2% has been the accepted target for a long time, ergo we must stick to that.

One fundamental argument for a small positive rate stems from the “wages are sticky downwards” point. That is, it’s desirable for wages in different professions to change relative to each other in line with supply and demand. But it’s difficult and sometimes impossible to actually cut wages in some sectors, else you get strikes. Ergo to some extent RELATIVE wage changes have to come about raising the wage in some sectors, rather than by cutting them in others.

Also inflation is a tax on people and firms with piles of cash and no idea what to do with it. Taxes have to be collected, and that tax on hoarders isn't a bad tax.

Tom Hickey said...

Right, Ralph. 2% is a guideline cet. par. Well things are not cet. par. now. Central bankers need to be shouting to the fiscal authorities that the ball is now in their courts instead of obfuscating about monetary policy that has failed over the past several years. Central banks have done all they can to stoke some inflation except drop cash out of helicopters and now that is on the table.

Bernanke, too. He should have been jawboning the politicians who hold the purse strings.

Ignacio said...

2% is just like 3% deficit limit in the EU: numbers pulled out of their asses.