I have pretty similar views on monetary policy as Ryan Avent, but I’m going to quibble slightly with this:
At the same time, a period of inflation above the Fed’s 2% target would give the central bank more headroom to raise its benchmark interest rate. The higher the level of long-run nominal rates, the less likely rates are to fall back to zero the next time trouble strikes.
Back in 2009, 2010, 0r 2011, it would have made sense to try to overshoot the 2% inflation target. But not today, with unemployment at 4.6%. If we pushed inflation above 2% when the economy is strong, then we’d have to shoot for under 2% inflation when the economy is weak. We’d be more likely to fall back to zero next time.
Indeed this is basically what went wrong in 2008. Inflation exceeded 2% during the housing boom. Thus when the Fed needed to move aggressively to ease policy in 2008, they held back in fear of inflation (which ran above 2% during 2008). It would make more sense to shoot for below 2% inflation during booms, and above 2% inflation during recessions.
Ryan does have some forceful arguments for higher inflation, but I think they’d be more effective if couched in terms of a change in the inflation target. Thus instead of calling for an overshoot of the 2% target by 1/2%, it would make more sense to call for undershooting a new and higher 3% inflation target, by 1/2%. Increasing the inflation target to 3% would indeed give the Fed more room to cut rates in the next recession, in a way that overshooting the 2% target would not. In addition, undershooting the target during a boom is more consistent with the spirit of NGDP targeting, which Ryan has previously endorsed.
This all might seem like a meaningless quibble; “What difference does it make what we do to the target, as long as we get 2.5% inflation.” In the very short run it may make no difference. But if you don’t make monetary policy decisions in the context of a clearly defined policy regime, then the economy is likely to be less stable, especially when we reach a turning point in the business cycle.
As always, this 3% inflation target is not my preferred option (I prefer NGDPLT). I’m just trying to illustrate what I think is the most fruitful approach for people with current views on policy that might be described as “dovish.”