Today’s speeches by Fed chairman Ben Bernanke and BOJ governor Masaaki Shirakawa are available on their respective websites.
There was also a brief Q&A session, however, during which Mr Bernanke was asked to comment on Olivier Blanchard’s suggestion of a 4 per cent inflation target to increase the scope to cut rates in a crisis. I’ve transcribed his response below:
“In theory, what you would want to do is compare the trade-off between the buffer created by inflation above zero giving you more space to go down in interest rates, versus the costs – the microeconomic and other costs – associated with inflation being too high.”
“There have been studies that have tried to figure out what the balance is and I don’t know how robust they are, but most of them are very low, they find that the optimal inflation rate is relatively low, and a number have found rates of around 2 per cent to be correct. So it’s a difficult question in the abstract to determine what would be the optimal rate of inflation. But now these studies are assuming that we’re starting from scratch in some sense.”
“We’re not starting from scratch. The central banks of the world have, over many years now, established a great deal of credibility for inflation rates in the vicinity of about 2 per cent and it would be a very risky transition if we in any way reduce our commitment to a 2 per cent or approximate 2 per cent inflation target.”
“We’re not sure how expectations would react. It could be that 4 per cent would not be a stable equilibrium and that people would expect an even higher inflation rate after that.”
“So while I certainly understand the logic of the comment, I think that given the tremendous investment that central banks have made in creating very strong expectations of price stability that we’re better off staying essentially where we are.”
“And I’d just add as an example of the benefits that despite increases in inflation a few years ago and now declines in inflation towards very low levels, at least in the United States inflation expectations have been remarkably stable, and that is in turn a factor which helps to stabilise inflation itself.”
Mr Bernanke and Mr Shirakawa were also asked about the future use of their emergency powers, whether the Fed might adopt a numerical inflation target, and whether currency swap lines between central banks should become permanent.
(I can send a full recording of the session to anyone who’s interested, but it’s 66MB.)
