Ivory Tower Types Fall for Bigger Inflation Fix – Bloomberg 08-21-13

Salient to Investors:

Caroline Baum writes:

The bad idea that the Fed could “fix” things faster with more inflation keeps popping up in academic circles: Kenneth Rogoff of Harvard in December 2008, followed by Greg Mankiw of Harvard, Olivier Blanchard at the IMF in 2010.

Noah Smith advocates inflation of 4 percent to 5 percent for the next decade, with the only downside to higher inflation being the “nuisance cost” of changing prices.

Kenneth Rogoff of Harvard says if the Fed or any central bank raises its inflation target, that would lift inflation expectations and reduce short and intermediate-term real rates, and in theory would not affect real long-term rates. Rogoff says 2 years of 6 percent inflation would speed the deleveraging process.

However, almost 5 years of zero-percent interest rates, large-scale asset purchases and forward guidance has not enable the Fed to even hit its 2 percent target from below.  And why would central bankers, who have fought hard to earn credibility with financial markets, forgo that trust for short-term gains?

In the real world, bond investors would look at 6 percent inflation and project 8 percent or 10 percent, so nominal bond yields would rise and long-term rates are what matter for capital investment.

Marvin Goodfriend at Carnegie Mellon said it is a slippery slope to do something for short-term purposes today, then do it again for short-run purposes. But Goodfriend says the idea of raising the inflation target has no traction among central bankers.

Read the full article at http://www.bloomberg.com/news/2013-08-21/ivory-tower-types-fall-for-bigger-inflation-fix.html

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