David Andolfatto — Is Neo-Fisherism Nuts?

Backing into MMT.

The point of all this is, IF higher inflation is desired (and I am by no means advocating any such policy), THEN why not keep the policy rate low and use "free lunch" fiscal policies as long as inflation remains below target? Why bother experimenting with the Neo-Fisherian prescription of raising the policy rate that's somehow supposed to make people magically expect higher inflation?

The post is a just a bit wonkish (equations) but worth reading since this is coming up more.

MacroMania
Is Neo-Fisherism Nuts?
David Andolfatto | Vice President, Federal Reserve Bank of St. Louis

TASS — Russia’s Elvira Nabiullina named 2016 European Central Banker by The Banker magazine

UK-based finance magazine The Banker named Elvira Nabiullina, who is the head of the Central Bank of Russia, as the European central banker of the year in 2016.

The Banker cited as one of the most important reasons to rank Nabilullina as the top 2016 European Central Banker her achievements in controlling Russia’s inflation rate.

"The efforts of the Central Bank head has led to the fact that the rate of inflation by the end of 2016 fell below 6% from 12.9% in 2015," according to the British magazine....

TASS
Russia’s Elvira Nabiullina named 2016 European Central Banker — The Banker magazine

Brian Romanchuk — Primer: Inflation Versus Rising Prices

One source of complexity in economic discussion is the ambiguity of the term "inflation." The usual definition is that this is the rate of growth of a price index of consumer goods (such as the CPI). However, economists quite often distinguish sustained rises in the price index versus one-time shocks. Unfortunately, it is difficult to determine whether a rise in prices is going to be sustained. For this reason, it is useful to avoid discussing generic inflation, and use more precise terminology....

"Inflation" is one of those weasel words.

Bond Economics
Primer: Inflation Versus Rising Prices
Brian Romanchuk

Bill Mitchell — US central bank decision to raise interest rates doesn’t make much sense

On December 14, 2016, the US Federal Reserve Bank pushed up its policy target interest rate from 0.5 per cent to 0.75 per cent. In its – Press Release – it said that the “labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year”. It acknowledged that “business investment has remained soft”. But it believes that even though it has increased the rate by 25 basis points, there is still room for “some further strengthening in labor market conditions and a return to 2 percent inflation”. The logic is very confused in my view. First, the US labour market is weak (in inflation pressure terms) notwithstanding the reduced official unemployment rate. 

Real wages growth has been effectively zero and the broad measure of labour underutilisation (U6) remains at 9.3 per cent (as at November). Second, the emphasis on central bank policy shifts is based on a view that elements of total spending are sensitive to interest rate changes and by increasing rates, price pressures will attenuated. The only problem with that logic is that all the elements of spending in the US (private investment, household durable goods) are hardly setting the world on fire. Private investment, in particular, is in poor shape. So by the US Federal Reserve bank’s own logic (which I do not share) it should be expecting on-going further poor investment growth, which will further undermine potential productive capacity. Not a sound strategy at all....

Bill Mitchell – billy blog
US central bank decision to raise interest rates doesn’t make much sense
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Carola Binder — The Future is Uncertain, but So Is the Past

What does this tell us? People are just as unsure about inflation in the relatively recent past as they are about inflation in the near to medium-run future. And this says something important for monetary policymakers. A goal of the Federal Reserve is to anchor medium- to long-run inflation expectations at the 2% target. With strongly-anchored expectations, we should see most expectations near 2% with low uncertainty. If people are uncertain about longer-run inflation, it could either be that they are unaware of the Fed's inflation target, or aware but unconvinced that the Fed will actually achieve its target. It is difficult to say which is the case. The former would imply that we need more public informedness about economic concepts and the Fed, while the latter would imply that the Fed needs to improve its credibility among an already-informed public. Since perceptions are about as uncertain as expectations, this lends support to the idea that people are simply uninformed about inflation-- or that memory of economic statistics is relatively poor.

Quantitative Ease

The Future is Uncertain, but So Is the Past

Carola Binder | Assistant Professor of Economics at Haverford College

Paul De Grauwe, Yuemei Ji — Animal spirits and the optimal level of the inflation target

Low inflation targets can cause economies to hit the zero lower bound during deflationary periods caused by even mild shocks. In such circumstances, central banks lose their ability to stimulate the economy. This column assesses the risk of this happening using a model that endogenises self-perpetuating optimism and pessimism in the economy. Given agents’ intrinsic chronic pessimism during times of recession, central banks should raise their inflation targets to 3 or 4% to preserve their ability to stimulate the economy when needed.…

vox.eu
Animal spirits and the optimal level of the inflation target
Paul De Grauwe, Yuemei Ji

Gerald Epstein — Development Central Banking, Part 1

This is part 1 of a two-part series by regular contributor and Political Economy Research Institute (PERI) co-director Gerald Epstein, adapted from his recent International Labour Office (ILO) working paper “Development Central Banking: A Review of Issues and Experiences.” This post focuses on the “inflation targeting” central-bank policy pushed on developing countries under the “Washington Consensus” and what is wrong with it. Part 2, next week, will follow with answers to the principal mainstream objections to a broader “development central banking.”

Triple Crisis
Development Central Banking, Part 1
Gerald Epstein | Professor, Department of Economics, Co-Director, PERI (Political Economy Research Institute), University of Massachusetts - Amherst

Merijn Knibbe — Central Banking in the Eurozone: moving away from ‘inflation targeting’

The system of Eurozone central banks has recently taken a large step away from traditional inflation targeting towards more active policies aimed at also guaranteeing financial stability. One can doubt the effectiveness of the new policies which, after all, are new. And unemployment is only mentioned in passing though the new policies implicitly admit that the post 2008 rise in Eurozone unemployment was not caused by rigid labour markets. But by a crisis. Despite this the new policies are a very welcome (though severly overdue) step ahead: they admit that too much credit is a dangerous thing, especially when it leads to asset price increases.

Real-World Economics Review Blog
Central Banking in the Eurozone: moving away from ‘inflation targeting’
Merijn Knibbe

Zero Hedge — Richard Koo Warns Of "Beginning Of The End" For Japanese Economy

More on inflation targeting.

Seems that no one realizes that the central bank can control the yield curve by announcing price rather than quantity.

Zero Hedge
Richard Koo Warns Of "Beginning Of The End" For Japanese Economy

Submitted by Tyler Durden

Simon Wren-Lewis — The Liquidity Trap and Macro Textbooks

A standard objection to the money hypothesis is that nominal interest rates did (after a time) fall to their lower bound. The counterargument – which the textbook also suggests - is that, if the money supply had not contracted, long run neutrality would imply that eventually inflation would have to have been higher, and therefore real interest rates on average would be lower. So in one way the story about how higher inflation could avoid a slump is there.

What is missing is the link with inflation targeting. Because textbooks focus on the fiction of money supply targeting when giving their basic account of how monetary policy works, and then mention inflation targeting as a kind of add-on without relating it to the basic model, they fail to point out how a fixed inflation target cuts off this inflation expectations route to recovery. Quantitative Easing (QE) does not change this, because without higher inflation targets any increase in the money supply will not be allowed to be sustained enough to raise inflation. In this way inflation targeting institutionalises the failure of monetary policy that Friedman complained about in the 1930s. Where most of our textbooks fail is in making this clear.  

mainly macro

The Liquidity Trap and Macro Textbooks

Simon Wren-Lewis | Professor of Economics, Oxford University

Would someone tell these folks that the "M" in MV=PT is M1 and not MB. Inflation targeting is not a transmission mechanism from MB to M1 to spending. To target something implies the ability to hit the target. The cb has not means to do this other than in targeting its desired interest rate through monetary policy. Moreover, no one actually believes that a cb will just sit by as inflation increases in spite of its having promised to do so in announcing an inflation target.

Ashwin — On The Folly of Inflation Targeting In A World Of Interest Bearing Money

As Mervyn King notes, inflation targeting has always been about improving the “credibility and predictability of monetary policy”.

However, in a world where money earns interest, minimising the uncertainty of macroeconomic policy does not equate to minimising the volatility of inflation. When all money bears interest, all that matters for those who hold money or bonds is the real interest rate earned on money and bonds. Given the fiscal stance and state of private credit growth, central banks should manage the real rate of interest such that rentiers do not capture a free lunch (i.e. real rates should not be too high) and there is no risk of a hot-potato/credit-bubble cycle (i.e. real rates should not be too low).

Money does not bear interest today because central banks pay interest on reserves. The primary reason why we live in a world of interest-bearing money is the gradual deregulation and innovation in financial markets over the last thirty years that triggered a shift from money to near-money assets. Apart from minimal liquidity reserves, there is simply no need to hold significant amounts of money in one’s zero-interest current account. Individuals can hold money in money market funds or treasury ETFs. Firms and high net-worth individuals can simply hold treasury bills that are as risk-free and liquid as money is. Even treasury bonds consist of a risk-free component that can be separated from the duration-risk component and monetised via the repo market. The equivalence of money and bonds is not just a temporary “liquidity trap” phenomenon. The evolution of financial markets means that the role of interest-free money is obsolete, now and forever.

In such an environment, the uncertainty and the volatility that individuals and firms care about is the volatility of the real interest rate.

Macroeconomic Resilience
On The Folly of Inflation Targeting In A World Of Interest Bearing Money
Ashwin

UPDATE:

Frances Coppola comments:

The liquidity trap as herald of fundamental change

UPDATE: Andy Blatchford notes:

Kalecki 1943

The rate of interest or income tax [might be] reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously."

Mervyn King — Twenty years of inflation targeting

Bank of England
Twenty years of inflation targeting
Speech given by Mervyn King, Governor of the Bank of England
The Stamp Memorial Lecture, London School of Economics
9 October 2012
(h/t Ralph Musgrave)

Michael Biggs and Thomas Mayer — How central banks contributed to the financial crisis

Even before the crisis, there were some who stressed that monetary policy should keep an eye on asset bubbles and the growth of credit. This column argues that the policy of inflation targeting, used widely in the 1990s and 2000s, did indeed lead to excessive credit growth that eventually bred financial instability.
VOX
How central banks contributed to the financial crisis
Michael Biggs, Global Economist at Deustche Bank, and Thomas Mayer, Senior Fellow at the Center of Financial Studies, Goethe Universität, Frankfurt

Mark Thoma — "Inflation Targeting is Dead"

It's hard to figure out how to fix the world if you don't have a reliable model that can explain what went wrong. The optimal money rule in a model depends upon the the way in which changes in monetary policy are transmitted to the real economy. Is it because of price rigidities? Wage rigidities? Information problems? Credit frictions and rationing? The best response to a negative shock to the economy varies depending upon what type of model the investigator is using. 

Thus, for the moment we need robust rules. Inflation targeting works well in models with Calvo type price-rigidities, and a Taylor type rule often emerges from models in this general class, but is this the most robust rule in the face of model uncertainty? We don't know the true model of the macroeconomy, that ought to be clear at this point. Does inflation targeting work well when the underlying problem is a breakdown in financial intermediation or other big problems in the financial sector? I'm not at all convinced that it does - some of the best remedies in this case involve abandoning a strict adherence to an inflation target in the short-run.

So, in the best of all worlds I'd prefer to have a model of the economy that works, find the optimal policy rule for that model, and then execute it. In the world we live in, I want robust rules -- rules that work well in a variety of models and in the face of a variety of different types of shocks (or at least recognize that the rule has to change when the source of the problem switches from, say, price rigidities to a breakdown in financial intermediation). One message that comes out of the description of NGDP targeting above is that this approach does appear to be more robust than inflation targeting. It's not always better, in some models a standard Taylor type rule is the best that can be done. But it's becoming harder and harder to believe that the Great Recession can be adequately described by models of this type, and hence hard to believe that we are well served by policy rules that assume price rigidities are the main source of economic fluctuations.

Read it at Economist's View
"Inflation Targeting is Dead"

by Mark Thoma

Everything but the obvious. Hint — try Godley stock-flow consistent macro modeling and fiscal rules (functional finance). Monetary policy is dead because Monetarism is moribund. Love live fiscal! Post Keynesianism rules.

Jeffrey Frankel — The Death of Inflation Targeting

It is with regret that we announce the death of inflation targeting. The monetary-policy regime, known as IT to friends, evidently passed away in September 2008. The lack of an official announcement until now attests to the esteem in which it was held, its usefulness as an ornament of credibility for central banks, and fears that there might be no good candidates to succeed it as the preferred anchor for monetary policy.

Read it at Project Syndicate
The Death of Inflation Targeting

by Jeffrey Frankel | Professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers.
(h/t Mark Thoma)

Key post wrt the history of monetary policy and where we are now. Short, too.