Monetary policy: Low inflation is a choice

Posted: March 31, 2014 in economy
Tags: , ,

IN ADVANCE of the publication of their much anticipated book “House of Debt” in May, economists Atif Mian and Amir Sufi have begun blogging. The work they have done on debt and recovery over the past few years has been hugely important and influential, and their blog has quickly become a must-read. So it is a little unfair that my first mention of it here is to pick at one of their recent posts.The authors post a nice image of inflation falling ever farther behind a 2% trend from 2000, and they write:The Federal Reserve directly controls the short-term interest rate. But what it really tries to target is inflation and its expectations. The Fed’s goal is to achieve the target of 2% inflation in the long-term, and its preferred price index is the core personal consumption expenditure price index that excludes the volatile food and energy sectors (or core PCE for short). So how has the Fed performed in achieving its target of 2% inflation in the past 15 years?The chart above plots the implied core PCE index if inflation had met its 2% target (red line), and the actual core PCE index (blue line) starting from 1999. The blue line is consistently below the red line, the gap has only diverged further since the Great Recession. The cumulative effect is that today the price level is 4.7% below what it should have been had the Fed achieved its long-run target…What we are witnessing …

via Economic Crisis


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