Charles Evans, the president of the Chicago Fed, has restated his extreme concern about a liquidity trap and tried to set out a bit more about how a price-level target would work.
His main concern was to address some cases in which running a price-path target could be stressful for a central bank. Notably he mentioned:
- A slow pick up in inflation
- An economy running closer to capacity and hence turning more rapidly to inflation
- Accelerating inflation at the time when it came to close the gap
My objective today has been a simple one: to discuss a policy tool that has received almost zero discussion, though it regularly comes out of careful analyses of mainstream economic models that we use to assess monetary policy options. We should put this policy tool on the table and debate its suitability to the current situation in the U.S.