Monetary policy’s limits with not so great expectations
Many of the world’s most senior central bankers believe monetary policy is close to the limits of what it can responsibly do.
Others disagree.
One argument is that if central banks would only commit to higher inflation, then monetary policy would be more effective in boosting demand. Proponents fall into various camps: nominal GDP targeters, those who favour a price-level target, or those who want to raise existing inflation targets. Read more
Mankiw calls for a price-level target
Harvard professor and famed textbook writer Greg Mankiw on Sunday argued the Federal Reserve should adopt a price-level target.
A price-level target aims for a certain level of inflation over the course of an economic cycle. In contrast, an inflation target has policymakers focus on a fixed point in the future.
Advocates argue price-level targeting is superior because of its flexibility. It allows for higher inflation when demand is anaemic with a view to reducing inflation below target once the economy recovers. As the Harvard professor notes, this would enable the Fed to reap the benefits that higher expected inflation would have in lowering interest rates without having to argue for the “political non-starter” of targeting inflation of, say, 4 per cent. Read more
Lockhart: “Sympathetic to more monetary stimulus”
Dividing the FOMC up into hawks and doves is only marginally productive but inescapable at the moment. Dennis Lockhart is a moderate member of the committee, and representative of a number of colleagues with backgrounds in banking rather than economics. A speech he has given today suggests he is in favour of further QE barring a change in the data.
To opt for more quantitative easing at this juncture is a big decision. Today I will walk you through the thicket of considerations that lead me, at this moment, to be sympathetic to more monetary stimulus in the near future.
Evans on price-path targets
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.
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Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS
Michael Steen, Frankfurt bureau chief, covers the ECB and the eurozone's economies. He joined the Financial Times in 2007 as Amsterdam correspondent and later worked as a front page news editor in London. Before joining the FT, he spent nine years as a correspondent at Reuters, mostly in foreign postings that included a previous stint in Frankfurt, as well as Moscow, Kiev and central Asia. He read German and Russian at Cambridge.RSS
Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS
Ralph Atkins, capital markets editor, has been writing for the Financial Times for more than 20 years following an economics degree from Cambridge. From 2004 to 2012, Ralph was Frankfurt bureau chief, watching the European Central Bank and eurozone economies. He has also worked in Bonn, Berlin, Jerusalem and Brussels. RSS
Claire Jones is Money Supply economics team writer, based in London. Before joining the Financial Times, she was the editor of the Central Banking journal and CentralBanking.com. Claire studied philosophy and economics at the London School of Economics. RSS
