Thursday, October 21, 2010

Hooray! FOMC member wants price-level target (amv)

Charles Evans on Monetary Policy in a Low-Inflation Environment: Developing a State-Contingent Price-Level Target
In a nutshell, I think there are special circumstances when price-level targeting would be a helpful complement to our current and prospective strategies in the U.S. Clearly communicating an expected path for prices would help guide the public’s understanding of the Fed’s intentions while we carry a large balance sheet and promise continued low interest rates for an extended period.

There are quite a number of academic studies of liquidity trap crises that find either price-level targeting or temporary above-average inflation to be nearly optimal policies; and yet, central bankers and the public generally loathe the idea that even a temporarily higher inflation rate could be beneficial or be consistent with price stability over the longer term.

Nevertheless, with potentially beneficial policies so well grounded in rigorous economic analysis, I cannot stare at our current projections for high unemployment and low inflation and think that these projections are consistent with the best monetary policies to address the Fed’s dual mandate responsibilities. Today, I want to expand the discussion of these tools. After all, debate on the merits is healthy.
HT J. Hamilton (Econbrowser).