here's a recent ....careful meditation :
" I think inflation expectations are really important."
harmless assertion as is
but its never used " as is" now is it ?
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" I largely believe the great moderation story."
yikes
"As a result of setting inflation targets (explicitly or implicitly), and acting to achieve them, central banks did succeed in stabilising inflation expectations at low levels"
succeed ? was it hard once the target was set ?
" and this has made the job of stabilising the economy as a whole rather easier."
hmmmm
if price change reduction acts indirectly to curb wage growth
yes fed clinching is less frequent and less severe
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" I think it is more than likely that if inflation stays above/below target for some time, inflation expectations will adjust. "
okay if expectations were static what in hell would that mean anyway ?
agents are idiots ?
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now we get to the meaty bits
"But I would not call this expectations becoming unhinged"
" Whether intentional or not, the use of the term unhinged
is designed to create an impression.
The impression is of disastrous uncontrollability."
unconscious designing aside
this is a plain truth eh ?
and makes the post worth something
"It is as if inflation expectations can be in one of two states:
either
low variance with mean reversion to the inflation target
or
highly volatile and could go anywhere. "
exactly the taboo story's motivator and he works thru with some clarity too
"In this second imagined state,
as expectations of inflation drive actual inflation,
we could have ‘inflation bubbles’,
which would become very costly for the central bank to prick."
" As we really do not want to go to that second state,
we have to do everything we can
to stay in the first state. "
" this view of the world I find it absurd. "
get it ? ..got it ...good !
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"Why would inflation expectations become so unanchored
from a central bank’s inflation target?"
" the only circumstances in which inflation expectations might become unhinged
are when the central bank itself became unhinged."
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but now he plays scare master himself:
ya sure unhinged it might get
" if the central bank was ordered to permanently monetise growing budget deficits"
that is the climactic coup
delivered by system bound liberal macronics
when we rads talk of protracted primary deficits
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some back drop:
"When central bankers talk about unhinged expectations,
they nearly always mention the 1970s and early 1980s."
" that was a period, in the US and UK, when it was very unclear
what the central bank’s inflation target was, or indeed whether it had one. "
hmmm ?? if burns and miller had announced targets ....
as in
" the lesson of that time is that inflation targets are important,"
" but not that they should never be changed or missed. "
changed how often ?
one might suggest often as wanted
so long as you don't miss too often by too much for too long
changed here gets undermined by missed
unless the missed is an implicit change
"I would draw a very different lesson from that period.
It is important not to have taboos in macro.
If there was a taboo at that time,
it was that rising unemployment would mean a return to the 1930s."
odd that
a taboo on the use of the reserve army of the unemployed
or as jerry calls it using
" variations in unemployment
as a means of stabilising inflation"
did this taboo prevent central bankers from " seeing "
that
"variations in unemployment
as a means of stabilising inflation. " ???
higher rates of unemployment
induced by credit policy
ie policy rates
"raised in a premeditated ... way"
higher enough
to curb a wage price spiral ?
perhaps the central bankers just
had not " stomach enough "
for that draft call at that time under those conditions
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"... today, roles have become reversed"
" nominal rates at the zero lower bound,
and doubts over unconventional monetary policy,"
" we could use higher inflation"
for sure
"raised in a premeditated and controlled way"
yes
" as a means of getting unemployment down"
yes
" and look at alternatives (like fiscal policy) that may be less costly."
yes
less costly or more beneficial
" But if raising inflation is taboo "
we will not have that discussion. In this context,
talk of expectations becoming unhinged reinforces that taboo."
