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Well at least that’s turning around – I wish everyone would stop using it … and actually just say what they mean.

Rebalancing so I’m going to do whatever was the most annoying frikken policy turn post-crisis.

I guess it could have been worse, say “sacrifice the economists to GDP” 😉

And we have to factor in that the past may not predict the future

http://blogs.ft.com/ftdata/2013/01/01/happy-55th-birthday-mr-and-ms-average-baby-boomer/

I find the US govt bond yield graph especially interesting!

I think the key bit here is differentiating between unanticipated and anticipated inflation – when I finally write about inflation tax (which is a bit further away now my income tax article has gone from one to three) I’ll chat about this.

I find the tax, and really the GE framework for redistribution, a useful lens for looking at all “broad” policies, Forces us to define the margin of any trade-off – and then try to measure it!

I’ve been spending (too much!) time thinking on this as well, lately. My tentative conclusion is, to paraphrase Muhammed Ali, I ain’t got no quarrel with them inflations!

From a personal perspective, at an important time in my life, a burst or two of inflation shrank my mortgage in relation to my income and greatly increased my equity, which was then available to lever into business opportunities, all in quite a short time frame.

So what price stability does is remove from the realm of the great unwashed (those who owe) the opportunity to score windfall gains from those to whom we owe. Inevitably, in the long run, wealth becomes even more concentrated in the hands of the few as a direct result. It’s a one way bet, mainly for those born into privilege (which statistics seem to show is the overwhelming wealth-generating strategy employed by that fortunate group of people).

Also, long term graphs show inflation already on a downward trend before inflation targeting was a gleam in Roger Douglas’ eyes, so how much academic work has been done on how much of the pain inflicted in the name a 2% or thereabouts inflation target was unnecessary?

And the wage-price spiral of the 1970s (fondly remembered by yours truly) is yesterday’s war. More relevant is when there is no definitive consensus on the level at which inflation definitely decreases total welfare (I could be toast on this,) trying to eliminate inflation/deflation cycles occurring over centuries time scales seems a little King Canutish.

Anyway, I’ll keep an eye out for your future work on this, Matt, as something to look forward to!

You think that inflation aids in the wage bargain? Hey it isn’t necessarily out of the question – during the lead up to the German hyperinflation workers had a “temporarily” good time. But as a structural matter I can’t really buy it.

Why income inequality rose is a fascinating question, I’m extremely keep to do some proper work on it in the NZ context. No doubt, I’ll start writing a lot more about that sort of thing at some point in the next few months 😉

One thing I’ve always wondered about is whether there could be a link between inflation targeting and the rise of income inequality post 1980. Pre-GFC, I seem to remember a lot of CB market guidance would spend a lot of time discussing wage growth. The implication being that if unit labour costs surprised on the upside, CBs would hit the brakes on the economy, but if they fell, then they would relax. I have no idea whether this was a feature of the DGSE models or something else.

The question arises whether this could somehow interfere with normal fluctuations in the share of income going to capital and labour. For example, maybe there’s something magical about periods of very low unemployment coupled with strong aggregate demand that helps to counterbalance some of the negative characteristics associated with capitalism. Mechanisms that could be in play here include an incentive for employers to invest in training and technology, because more labour is not available, or an increase in the participation rate having positive effects on the marginal product of the least qualified workers.

I realise that if taken too far this sort of thinking ends in the wage-price spirals of the 1970s, but I still think it’s interesting.

“Economists seem to have been spared the threat of unemployment,
perversely, but I am sure that if this ceased to be the case you would
suddenly see a lot more concern about this issue and less piffle about
the threat to financial stability caused by QE”

Although I should potentially take that personally, I actually agree with it pretty strongly 😉

“A few other things worth noting:”

All points I agree with. Small open economies experience more “shifts to potential output/supply shocks”, making level targeting a bit more problematic.

I’d also note that inflation and the price level are seen as the issue of debate, as they are what the central bank can “control” in the medium to long term – and our medium-long term goal is to provide certainty about “general prices” given this. “NGDP” targeting is essentially “flexible price level targeting” in many ways. If it is done right, then in the short-term they are responsible for demand driven unemployment – and as you say, there has been a massive failure, and focus on side issues, in many places. This is indeed frustrating.

However, we also need to be clear that we aren’t really “managing the path of the economy” – sometimes these factors can be taken a bit too far.

A few other things worth noting:
– Many, though not all, of the problems of inflation targeting stemmed from very poor economic forecasts about the prospective rate of recovery. NGDPLT by itself doesn’t fix this. Generally bond markets seem to be better forecasters than economists.
– Wren-Lewis states that NGDPLT is not “optimal” but then defines optimality in terms of inflation! We need to have a debate about what the underlying “thing” is. Scott Sumner thinks NGDP is the “thing” and he has a point for two reasons. Firstly, in a modern economy with lots of debt, variations in NGDP have a high cost (because people pay their debts with NGDP). Wren-Lewis actually refers to some research on this. Second, as an investor, the cost line (usually CPI linked) in your assumption is very important but the revenue line is even more important! Given that investment is usually the most volatile part of a market economy, it’s good to encourage and stabilise investment. Personally, I still wonder if the real “thing” is unemployment, as maybe the underlying point of monetary policy is to reduce unnecessary misery.
– Several proponents of NGDPLT have said it might not be appropriate in a small open economy, or one dependent on a single commodity, because e.g. what if a terms of trade shift caused the bank to target negative RGDP growth. I am amazed that more work has not been done on this important question.

This is definitely a reasonable case – we need to honestly compare the costs and benefits associated with it though, given that we previously avoided level targeting due to the fact we felt it had higher welfare costs!

I believe I’ve said in the past I’m in the flexible inflation targeting camp, but if the weight of evidence shifts I’d be happy to move. Down the end of this post I have the three areas I see a “difference”:

http://www.tvhe.co.nz/2013/01/31/inflation-stickiness-demand-and-judging-the-success-of-monetary-policy/

And if our view on the social costs and benefits regarding those elements changes, then switching could well make sense.