Memo to Krugman: Quasi-monetarism isn’t monetarism

Here’s Paul Krugman criticizing what he calls “quasi-monetarism”:

Now, in principle you can get traction by making money a less attractive store of value. In particular, if you can credibly promise future inflation, that will make the real return on money negative. But getting that kind of credibility is tricky, especially given the normal prejudices of central bankers. And in any case it’s very different from the kind of thinking we normally associate with monetarism, which focuses on the current money supply.

That’s a good description of the problem with old-style monetarism, but has no bearing on the quasi-monetarist model.  Quasi-monetarists are generally in favor of level targeting, having the monetary authority make up for shortfalls or overshoots.  That means we don’t focus on the current money supply, we focus on the future expected path of policy as a way of controlling NGDP.  The expectations traps that appear in Krugman’s models result from a memory-less inflation rate targeting regime.  Even Michael Woodford argues that level targeting is a good way of addressing expectations traps.  It’s infuriating to see Krugman treating us like a bunch of dummies, especially as at least one of us described why temporary currency injections had little or no effect long before Krugman himself did.

Krugman is surely right about the “prejudices of central bankers” being an impediment to appropriate policy, just as the prejudices of Congressmen are an impediment to appropriate fiscal policy.  That’s the whole point of the quasi-monetarist movement—we are trying to change those prejudices.  But from a purely technical perspective there is nothing in quasi-monetarism that conflicts with Krugman’s basic expectations trap model.  A credible regime of level targeting is far more politically acceptable than suddenly raising the inflation target to 4% during recessions, and just as effective.

HT:  Dilip



30 Responses to “Memo to Krugman: Quasi-monetarism isn’t monetarism”

  1. Gravatar of Scott N Scott N
    13. September 2011 at 11:08

    Nick Rowe has also posted a good response to Krugman here:

  2. Gravatar of marcus nunes marcus nunes
    13. September 2011 at 11:31

    That´s right. But Krugman wanted 2 things;
    1. More government and
    2. Peddle his liquidity trap view

  3. Gravatar of Morgan Warstler Morgan Warstler
    13. September 2011 at 11:50

    Frankly, the BEST way to make DeKrugman deal with you is to attack on the naming convention meme.

    Go with Market Monetarism, it still sounds kind of like the Fed is made powerless, as if the problem were that they were anti-free market.

    BANG the drum. Make him say the words Market Monetarism – and you win. From them on he has to keep responding to it.



    Matty running up the white flag on ont he Eurozone is doubly sweet:

    “The combination of monetary union, hard money thinking at the ECB, and refusal to engage in substantial fiscal transfers is a business class wet dream. You have asymmetrical mobility””capital, goods, and high-end professional labor are super mobile while working class labor is largely fixed. With exchange rates fixed and the central bank inflexible, the only way to respond to macroeconomic shocks is to cut wages and social welfare benefits. They’ve created an institutional setting under which not only is the nominally socialist government of Spain pursuing a hard-right agenda of austerity and low wages, but they are correct to do so not because an austerity and low wage agenda is a good thing but because the institutional environment of Europe leaves them with no alternative.”

    Scott, you should be in AWE of Mundell.

    Second, Matty credits Waldmann, who credits Mosler, who doesn’t credit me…

    No worries. Mosler is a tard. Blind squirrel, nut.

    But after all, printing money and giving it to the savers, to solve the crisis is me.

    “Toot, toot!” that’s my own horn.

    Of course, I came up with it two years ago just to stick my finger in the eye of progressives screaming we should print money.

    And now after Matty has taken it in the shorts for two years he suddenly thinks that perhaps it is best he fork over the win on “moral hazard” to the opposition.

    Win noted.

  4. Gravatar of Benjamin Cole Benjamin Cole
    13. September 2011 at 12:46

    Given the fetish some have for permanently fixing the value of paper currency in monetary formaldehyde, I think talk about NGDP, as opposed to higher rates of inflation, is smart.

    NGDP’ers should always emphasize that what they are seeking is economic growth with less, not more, governmental taxes, outlays or programs.

    And the more you cite Milton Friedman the better, fair or not. Wrap yourselves in every mantle of conservatism you can find.

  5. Gravatar of Liberal Roman Liberal Roman
    13. September 2011 at 13:26

    “In particular, if you can credibly promise future inflation, that will make the real return on money negative. But getting that kind of credibility is tricky

    Oh, but it’s not at all tricky getting a super majority to support a WWII style fiscal expansionary policy. Nope that’s a walk in the park.

  6. Gravatar of Morgan Warstler Morgan Warstler
    13. September 2011 at 13:37

    Liberal ROman,

    WHY don’t you do the things that are easy?

    1. Throw out minimum wage.
    2. End Davis Bacon.
    3. Roll back EPA protections.

    These things are EASY to do!

    It’s almost like Obama is choosing high unemployment over pissing off Big Labor and Greenies.

  7. Gravatar of Steve Steve
    13. September 2011 at 13:53

    Scott wrote: “A credible regime of level targeting is far more politically acceptable than suddenly raising the inflation target to 4% during recessions, and just as effective.”

    Not only is it more acceptable, but in many cases it is EXACTLY THE SAME: 0% inflation for a few years during recession? Then, target 4% per year in the recovery!

    Krugman paraphrased:
    “In particular, if you can credibly promise long-term fiscal stimulus, that will raise aggregate demand and end the liquidity trap. But getting that kind of credibility is tricky, especially given the normal prejudices of Congress and the electorate.”

  8. Gravatar of Scott Scott
    13. September 2011 at 14:14

    Scott, as far as I can understand where Krugman is coming from, I think some Keynesians (myself included) don’t grasp the lever that the Fed is supposed to pull in order to enact further monetary stimulus. QE is helpful, sure, but the traction appears to be low (and in Krugman’s defense he often says it’s better than nothing, but not very effective). How does saying “we’re targeting X% NGDP growth” differ fundamentally from committing to keep interest rates essentially zero for the next two years? Certainly what the Fed says can move markets, but it would seem that what the Fed actually does at a given point (i.e., changing interest rates) has much more real effects.

    I think Krugman and others would probably agree with your complaints about the Fed’s interest on reserves (and Krugman should really make more noise about that), but aside from helicopter drops, what can the Fed do to actually get the money into circulation? It would seem that mailing a check to everyone for their equivalent payroll tax cut would be effective, but the Fed doesn’t have any “helicopter drop” power that I know of.

  9. Gravatar of Charlie Charlie
    13. September 2011 at 15:18

    It doesn’t seem like he’s disagreeing with you in theory. He agrees with you “in principle.” He’s also agreeing in principle with his own work on Japan in 1998.

    He’s just arguing that level targeting won’t work, because the Fed won’t be able to commit to future level targeting. The bankers would talk a good game about level targeting in 2011, but in 2014, they may decide catch up inflation is too costly. The whole thing falls apart.

    I don’t know who is right, though I tend to side with you (and 1998 Krugman). I certainly think level targeting is worth trying. But I think the argument has some merit.

  10. Gravatar of Scott Sumner Scott Sumner
    13. September 2011 at 16:05

    Scott N, I have a slightly different view, and left a comment over there.

    Marcus, It certainly seems like he wanted bigger government.

    Morgan, I’m not surprised that you are crowing.

    Benjamin, I hate to say it, but your comment sounded almost Morgan-like.

    Liberal Roman, Exactly my view, but you put it better. I wish I could write like my commenters.

    Steve, yes, that’s exactly right.

    Scott, The fed can only do three things.

    1. More base money today (QE)
    2. Less base demand today (IOR)
    3. Promise more expansionary policy in the future.

    At a deeper level, 2 and 3 are the same. promising more expansionary policy later reduces base demand today.

    That’s all, but no fiat money central bank has ever tried and failed to inflate. I simply don’t believe it is a problem. The problem is getting them to try. Do you seriously think I couldn’t create inflation if put in charge of the Fed (as a dictator)?

    Charlie, With all due respect that’s absolutely nuts. The Fed would never renege on that sort of promise. It would be humiliating. Look how reluctant they are to budge from the 2% inflation target, when they could arguably still be adhering to it with a switch to level targeting. Breaking a level targeting promise would be 100 time more humiliating. And they aren’t even willing to do that tiny little adjustment, for fear of loss of credibility. And remember THEY DON’T EVEN HAVE AN EXPLICIT TARGET TODAY.

    Plus, Krugman is completely wrong about Japan, as I’ve point out 100 times. The BOJ had the option of not tightening money in 2000 and in 2006, and yet they tightened. That’s shows the problem is not credibility, it’s that they are simply a bunch of ultra-conservatives who hate inflation.

  11. Gravatar of Charlie Charlie
    13. September 2011 at 16:41

    “Look how reluctant they are to budge from the 2% inflation target,”

    It’s funny. We both agree they are targeting 2% inflation. We both agree that they bear a cost for missing that target (though you seem to believe the cost is higher than I do). And yet the Fed conisitently failed to hit even their modest target throughout 2010. Yet, you don’t see how that hurts your credibility argument? They can’t even hit a woefully inadequate target. Ha, even when they get a fresh shot at it each time (don’t even have to catch up).

  12. Gravatar of MikeDC MikeDC
    13. September 2011 at 17:50

    Could you also comment on the Henry Kaspar piece Krugman starts with?

    Kaspar says “The creditors’ propensity to spend is lower than that of debtors; after all this is why they are creditors. They would want to lend on the means transferred to them, but do not find enough households or firms willing and able to take on more debt. To use Brad DeLong’s term: there is a lack of safe assets.”

    Rather than blindly supplying the demand for money, or nudging borrowers (including the government), are their feasible policies (aside from the obvious inflation) to get lenders to lend again? Well, a starting point would be ending IOR 🙂

  13. Gravatar of Matt Waters Matt Waters
    13. September 2011 at 22:16


    It’s a problem of “optics” as they say for the inflationistas. Compare these two statements (the Fed needs about 5% inflation to get back to long-term price level trend):

    “The Fed will change its inflation target to 5% and will do all the QE and IOR-lowering necessary to accomplish that.”

    “The Fed still has a 2% inflation target, but is level-targeting instead of rate targeting. Because of consistent under-shooting of the 2% inflation rate target the last three years, that may require higher inflation in the short-term. We will do all the QE and IOR-lowering necessary to talk about.”

    At this point, I’ve gotten to the point where price-level target is a worthy retreat from NGDP targeting. Even if the Fed misses the price-level target by 1%, that will be MUCH better than the current policy where the Fed consistently undershoots the inflation target by 1%.

    Also key is to not put a number on QE. Just say that it will keep doing it until TIPS spreads suggest that the Fed will be successful in reaching the price-level target within a couple of years. By putting a completely unnecessary number on QE, the Fed then seems “impotent” because it cannot adjust for changing market conditions like it can for the Fed funds rate.

    Why the Fed funds rate is a worthy target for open-market operations but not TIPS spreads or, eventually, NGDP futures is beyond me.

  14. Gravatar of 準マネタリズムはマネタリズムじゃない-クルーグマンへのメモ by Scott Sumner – 道草 準マネタリズムはマネタリズムじゃない-クルーグマンへのメモ by Scott Sumner – 道草
    13. September 2011 at 23:07

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  15. Gravatar of Charlie Charlie
    14. September 2011 at 09:39


    I’m not sure in what way your addressing what I said. I don’t disagree with anything you said. In my comments I’ve made two points:

    1. Krugman is agreeing “in principle.” He’s disagreeing in practice. He thinks if it is possible for the Fed to commit to level targeting they could gain traction. In fact he says so, “if you can credibly promise future inflation, that will make the real return on money negative.” Krugman is arguing its very hard for the Fed to gain this traction. In my first comment, I argue that Scott is not really responding to PK’s point.

    To that, Scott says “it’s nuts.” He argues that the Fed has tons of credibility, and it’s crazy to point out otherwise.

    2. My second comment pointed out that Scott, the Fed, and just about everyone else thinks that the Fed has a policy goal of 2% inflation. Yet, not only have they missed this goal for a substantial period of time. The market thinks they will continue to miss this goal for a substantial amount of time in the future! I’m not talking about level targeting. I’m talking about their much more modest goal. The market does not think the Fed will hit its modest. This proves the Fed is NOT credible. Scott, even believes they bear some large cost for missing this goal (though I don’t really see it). Obviously, Scott knows the Fed has missed their target and is expected to continue missing their target, and yet, he also holds the belief that the Fed is credible. These beliefs are obviously in conflict. That’s all I’m trying to point out.

    The point is, we should realize that we are arguing that it is possible for the Fed to become credible. Not only, credible enough to meet their modest goal, but much, much more credible to hit a much more ambitious goal.

    Do we even have a good idea why they can’t hit their current goal? We can’t even seem to agree whether it’s because collectively they don’t want to, or politically, they aren’t able to do the things they would need to do to accomplish it.

  16. Gravatar of Jimmy Jimmy
    14. September 2011 at 14:30

    Which do you like most? I think it to be different in Krugman with you, and this is the reason why the policy that he likes is different from you.

    1. By the daring monetary policy and the aggressive fiscal policy, US economy restores a natural rate of unemployment one year later.

    2. By the daring monetary policy, US economy restores a natural rate of unemployment 2-3 years later.

    3. By the present monetary policy, US economy restores a natural rate of unemployment five years later.

    4. Both the monetary policy and the fiscal policy return in a time of peace, and US economy follows Japan.

  17. Gravatar of Matt Waters Matt Waters
    14. September 2011 at 15:27

    I think we’re generally on the same page. I guess it depends on what one means by the Fed is not credible. They either mean that the Fed is not WILLING or that the Fed is not ABLE.

    The classic trick from DeKeugman is to say the former and then imply the latter. Yes, it’s clear that the Fed has not been willing to either hit its inflation target or the corresponding price level target. Even as inflation expectations went down considerably in late-2008, when TIPS spreads went negative, the Fed showed little alarm about low inflation in and of itself. They focused mainly on the stability of the banking sector and did not align their policy at all with inflation expectations.

    But for the latter point, I see no reason why the Fed would be unsuccessful in raising inflation if they really wanted to. The Fed Funds rate is a good example. Today, the FOMC makes an announcement and the market quickly front-runs their actual open-market actions. But before around the 70’s, investors did not realize they could make money on Fed announcements and the Fed had to act like any other market player. But as its credibility built up, the market did front-run its actions.

    Similarly, the Fed has no issue with ability to change the price level expectations through brute force, acting like any other market player until the Fed injects enough liquidity to actually raise the price level (or increases velocity through IOR).

    Such a brute force strategy, though, might require possibly trillions of QE. This is where Krugman is correct. Briefly, mostly because of wrong-headed predictions by Bill Gross, TIPS spreads did widen and the stock market and private-sector hiring picked up considerably. But it all turned out that Bill Gross greatly miscalculated the Fed’s real desire to raise the price level and investors quickly went back to a flight to safety mentality. The fact that Bill Gross is now buying treasuries at these extremely high prices says volumes.

    Where Krugman is wrong is somehow thinking the Treasury would be much more credible with fiscal stimulus than the Fed. The issue is that BOTH lack the willingness to increase the monetary base or velocity enough. The fact the Fed lacks willingness does not mean we should instead rely on government spending. It means the Fed should become willing!

    “Willing,” to the point where the market believes the Fed, might take much more open-market action than we have seen to this point, on the order of trillions of QE. But just because the market might take some convincing doesn’t mean the Fed shouldn’t at least try making an explicit target for price level, with unbounded QE until that TIPS spreads reach that point. The Fed shouldn’t need help from the market when it has the printing press.

  18. Gravatar of Scott Sumner Scott Sumner
    14. September 2011 at 16:27

    Charlie. You miss the point. With growth rate targeting they can say they are always quite close, just missing the target slightly. With level targeting it would be much different.

    Consider Japan, their GDP deflator has fallen about 1% a year for 17 years. That’s very close to zero inflation. Now switch to a price level target–they’d have to aim for 17% inflation this year!!

    MikeDC, I don’t get his argument at all. What does it have to do with targeting NGDP? Debt doesn’t prevent a central bank from boosting NGDP at Zimbabwean rates. He seems to be trying to develop a real theory of a nominal problem.

    Charlie, Another way to make my point is that if the central bank keeps missing a growth rate target by 1% it’s a big problem. If year after year they keep missing a level target by 1% it’s no big deal.

    You say the Fed hasn’t even hit their current goal, and in a sense I agree. But they feel they’ve come close enough that extraordinary measures aren’t needed. The Fed says it can do more, but that inflation is pretty close to 2%. Having said that, it might do a bit more late this year, as it is still a bit worried about demand shortfalls.

    Also note that Krugman criticizes the Fed for not doing more, and would keep criticizing them until NGDP is growing adequately. I can’t even imagine Krugman ever saying “they have tried, and there is nothing more they can do.” So in that sense he agrees with me. If NGDP is below target, the Fed can and should do more. We both think that.

    Jimmy, I’m not sure I follow–let me just say that a daring monetary policy is all we need. Fiscal policy can’t do much.

  19. Gravatar of Charlie Charlie
    14. September 2011 at 18:27

    “I guess it depends on what one means by the Fed is not credible. They either mean that the Fed is not WILLING or that the Fed is not ABLE.”

    You are using able in the naive sense. This is like saying the government is ABLE to effectively provide public goods at low cost but is not willing to. Yet, when we look a t the lens if what government can do through the lens if public choice economics when we realize politicians want to get re-elected and constituents form groups of self -interest, what it is able to do changes a lot.

    I am pointing out that we need a public choice model of the Fed to see what it is able to do. I think we are very far from that on this blog, and until we have it we can never really answer Krugman’s credibility critique.

    Let us take Scott’s model and see if it works. Scott believes the Fed sets a goal, if the Fed hits the goal they don’t pay a cost, if they fail to hit the goal they pay a cost depending on how much they miss they goal. By this logic, QEII should have been very popular. It helped them get closer to their goal. I think this is a very bad model. The fact is the Fed paid a very large cost for QEII. I think a better model is to add on to this model that the Fed pays a very high cost for doing something strange or abnormal. This explains why the Fed is happy to aim for their target, unless they have to do something to drastic.

    Now take the two models to level targeting. Scott thinks the Fed will bear a much higher cost for missing their target, but he has no appreciation of the high costs it would take hit its target. It’s not at all clear which would win. Now add to this that credibility arguments are subject to self-fulfilling prophecy. If the market knows the Fed is willing to pay the high cost of doing something, credibility would be self-fulfilling and they wouldn’t have to. But if not, the lack of credibility would be self-fulfilling and they’d be pushed so far the cost of abnormal behavior is too much to bear.

    Lastly, consider that the decision to level target is itself a drastic action that has a large cost. We can imagine that a central bank that commits to reflating gets a nice reward that makes up for the drastic behavior cost. What happens? Banks ttreflaresuccessfully declare

  20. Gravatar of Charlie Charlie
    14. September 2011 at 18:44

    (To continue)

    Banks that can successfully reflate pay the upfront cost, while the others do not bear the cost. The implication then is that Scott’s favorite talking point “No bank has ever tried to relate and failed” is purely selection bias. All the ones that would have failed didn’t bear the cost of reflating.

    We often say things like “if Sumner were Fed chair” but one of the best pieces of evidence that this public choice view of the Fed may have merit is that last decade’s Scott Sumner IS fed chair! You guys keep thinking Krugman and I are making policy arguments. We aren’t. You know we aren’t. You said in your last post that Krugman would say the Fed should do more. I said it in my first comment. Our point is a much deeper form if despair. It’s possible even last decades Scott Sumner can’t bear the cost of drastic action. It’s possible we are stuck in a bad equilibrium, where the institutions we have formed and the politics of the day won’t let us out.

    I have offered the crudest possible model of Fed behavior. I don’t think it is realistic, and I’d be the first to tell you I have no idea to begin where to start modeling the incentives and constraints the fed faces. But I do think there is enough in this simple model to provoke some thought and pause.

  21. Gravatar of Morgan Warstler Morgan Warstler
    14. September 2011 at 20:37

    First of all Charlie, don’t you dare start using a bunch of shitty big words to say what I say with brutal poetry.

    Public choice is naive. Hegemony is mature, in the old whore sense. Government exists for those people who matter, and the US has a top 1/4 to 1/3 or so who count.


    “Charlie. You miss the point. With growth rate targeting they can say they are always quite close, just missing the target slightly. With level targeting it would be much different.”

    This is TRUE, but you show the gap Charlie is trying to sneak thru.

    I’ll block him and you.

    SINCE level targeting will accrue, the stated target will OBVIOUSLY be much lower, so fare less accrues.

    Oh wait, whose been arguing that?


    SEE when we place the NGDP target down at 3%.

    Do your modeling.

    And psssst.. Charlie. Now it is CREDIBLE.

    Why? Because at 3%, the conservatives will know we’ll routinely push up against that whenever the wind blows West to East (that’s why the poor side of town is always the East).

    And since we’ll easily hit 3%, and need to raise rates, there will be extra pressure to adopt deflationary wage and regulatory policy.

    To say it another way, we’ll have to become COMPETITIVE.

    All roads lead to Rome.

  22. Gravatar of Morgan Warstler Morgan Warstler
    14. September 2011 at 20:55

    Charlie, let me say this another way….

    Take 2000-2010 and level target at 2%.

    ROFL. Don’t be an idiot.

    The Fed credibly has been doing “opportunistic disinflation”

    DeKrugman is not an economist. You are not a logician.

  23. Gravatar of Morgan Warstler Morgan Warstler
    14. September 2011 at 21:12

    Scott, this is what I mean about you and Fisher -it is all sugar (even Keynes), NOBODY wants to narrate it thru the medicine part, nobody wants to say what the Fed would have done to keep 2002-2008 from happening, you included.

    If you don’t get good at that part:

    1. you wont win conservatives.
    2. you’ll leave an opening for the milquetoast (Charlies) of the world.

  24. Gravatar of Matt Waters Matt Waters
    15. September 2011 at 01:30


    The issue is that you’re putting Fed action in the same category as, say, the government building roads.

    Unlike building a new bridge, the open market desk at the New York Fed can buy as many bonds as they want with a few keystrokes. Versus the very large coordination effort with building a new bridge, open market purchases of Treasuries with newly printed money is extremely small. The structural difficulty of QE and changing IOR is very small.

    So, I’m not sure where you’re going exactly with the “pubic choice” argument. Yes, the reason why NGDP or price-level targeting has not been done so far is because more action is not yet popular among economists, much less Congress and the general public. That’s the whole point of this and other quasi-monetarist blogs. To make more action popular at least among mainstream economists.

    But once even price level targeting does become popular enough to become the FOMC’s policy, then there’s very little human cost to buying bonds until inflation expectations go up. If the Fed has to do it the old-fashioned way, where the market does not react to the Fed’s actions or statements, then so be it. I do not think the Fed will have issues inflating its own currencies. If the market buys into the Fed’s credibility, then that’s good too. The market front-running the Fed is not necessary or sufficient for level-targeting.

  25. Gravatar of MikeDC MikeDC
    15. September 2011 at 05:34

    What does it have to do with targeting NGDP? Debt doesn’t prevent a central bank from boosting NGDP at Zimbabwean rates. He seems to be trying to develop a real theory of a nominal problem.

    Would it be wise to boost NGDP at Zimbabwean rates? What’s the model that doesn’t happen?

  26. Gravatar of Charlie Charlie
    15. September 2011 at 09:40


    1. My model explains why the Fed isn’t able to hit there target now, even it though “it would just take a few keystrokes.”

    2. Here’s Mankiw on political incentives the Fed faces: “Even if that were true, a higher inflation target is a political nonstarter. Economists are divided about whether a higher target makes sense, and the public would likely oppose a more rapidly rising cost of living. If Chairman Bernanke ever suggested increasing inflation to, say, 4 percent, he would quickly return to being Professor Bernanke.”

    Now, Sumner thinks nominal GDP targeting is politically feasible, Mankiw thinks level targeting is, and I’m questioning whether either is. The overall point is that Mankiw is saying the Fed can’t just do whatever it wants. It’s constrained by politics. A public choice model applies.

    If the Fed was printing trillions and buying bonds, would it have a political cost? What would happened if Kochlakota, Plosser and Fisher all resigned and started Fed bashing? What if all this happened and they were still well below targer, would it have the gumption to keep going? If not, it’s not credible.

    3. For whether the Fed can do it without credibility, you can see Sumner 1993 or Krugman 1998.

  27. Gravatar of Charlie Charlie
    15. September 2011 at 09:44


    I never have any idea what you are saying. I usually just skip over your comments, but at I was looking up something Matt said I saw you addressing me. I have no idea what point your trying to make though.


  28. Gravatar of Scott Sumner Scott Sumner
    15. September 2011 at 18:53

    MikeDC, No it wouldn’t be wise, but it could be done. Doesn’t he deny it could be done?

  29. Gravatar of MikeDC MikeDC
    16. September 2011 at 04:50

    No, I notice Kaspar refers back to this (among other more scholarly papers) emoting that inflation will be a disastrous Pandora’s Box that shouldn’t be opened.

    I read the liquidity trap proponents as saying “sure, you could get monetary traction with a a large dose of inflation, but if you tried to do that, you could lose control”.

    I know you’ve touched on this before, but it might be worth re-explaining the mechanisms by which the Fed could keep control and what sort of political and market pressures the Fed will face in a moderate to high inflation setting.

  30. Gravatar of Scott Sumner Scott Sumner
    17. September 2011 at 09:43

    MikeDC, When inflation was persistently high (the 1970s), so was NGDP growth. No one is proposing going back to high NGDP growth rates. But without high NGDP growth, at most you’d have transitory inflation during supply shocks (mostly oil and food.)

    You should create a NGDP futures market (or monitor TIPS spreads) to avoid a buildup of inflation expectations.

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