Let's Get Rid of Inflation Only Target!

[ShoeshineBoy]

At last, someone who makes a little sense:

http://www.ft.com/cms/s/0/34f7848e-39a7-11de-b82d-00144feabdc0.html?nclick_check=1

The argument here is that the Fed should not be using inflation as its sole target. (Of course, I would argue that the Fed's definition of inflation is bogus as well.)

He argues for using assets, a "normal" rate of growth for the money supply, etc.

Will anyone listen? Has any one seen any signs that the big boys are finally rethinking this ridiculous game of targeting inflation to target money supply growth??? (Please say 'yes'...)

 

[Scataphagos]

Don't know that it makes any difference.

When they were pumping inflation at 6-8% or so, they kept telling us "don't worry, be happy... inflation is only 2%".

They'll do whatever they want. They'll report it however they want for the desired effect. They are bound by no moral principles.

 

[ShoeshineBoy]

Quote from Scataphagos:

Don't know that it makes any difference.

When they were pumping inflation at 6-8% or so, they kept telling us "don't worry, be happy... inflation is only 2%".

They'll do whatever they want. They'll report it however they want for the desired effect. They are bound by no moral principles.

I feel more like it there is no rhyme or reason for what they do. On the one hand you have a Paul Volcker who is very tight on the money supply. Then you are followed up with Greenspan who is the opposite. There is no consistency...

 

[Martinghoul]

It's not entirely clear that this is a slam-dunk and will make things a lot better. Inflation targeting has a few flaws...

 

[ShoeshineBoy]

Quote from Martinghoul:

It's not entirely clear that this is a slam-dunk and will make things a lot better. Inflation targeting has a few flaws...

Well, yes, that's the point: inflation targeting is very flawed both because their number is bogus and because inflation is not the only valid target.

 

[Martinghoul]

Quote from ShoeshineBoy:

Well, yes, that's the point: inflation targeting is very flawed both because their number is bogus and because inflation is not the only valid target.

It's an old and rather tired academic debate. I don't wish to participate in it, to be honest.

One thing worth mentioning is that the Fed, unlike the ECB and the BoE, has a dual mandate, so they don't exclusively target inflation.

 

[ShoeshineBoy]

Quote from Martinghoul:

It's an old and rather tired academic debate. I don't wish to participate in it, to be honest.

One thing worth mentioning is that the Fed, unlike the ECB and the BoE, has a dual mandate, so they don't exclusively target inflation.

I don't think there's much to debate at this point. The inflation-only target almost brought down the global economy, so I can't see that school of though winning too many debates.

I think the second mandate - I assume you're talking about unemployment - lives within the same world. The underlying issue is how can we monitor if the Fed is overinflating the money supply and unemployment is going to tell you very little about that, right?

 

[Martinghoul]

I disagree...

Inflation targeting is a good idea, in theory, and, in my view, is superior to anything else that has been realistically proposed so far. However, its fundamental limitation is that it relies on flawed and manipulable inputs. In the latest cycle, the problem turned out to be centered around OER/housing component of CPI.

IMHO, there's no policy framework that can work outside of the world of politics. That, in turn, suggests to me that bubbles are as inevitable as the sun rising in the East and monetary policy won't make such a big difference.

 

[ShoeshineBoy]

Quote from Martinghoul:

I disagree...

In the latest cycle, the problem turned out to be centered around OER/housing component of CPI.

Good point. If they monitored housing as part of inflation, I completely agree.

All of this is somewhat semantics. Well, you might disagree with that because I think your point is that the underlying economic theory is sound - it's just a matter of inept definitions.

But they need to do something different is all I have to say. And, more importantly, they need to expand the money supply by realistic levels!

 

[Martinghoul]

Then we agree...

I am just skeptical that any improvement to the monetary policy process can be made due to it being so political. Therefore, to me, inflation targeting is a somewhat lesser of the available evils.