Monday, July 7, 2014
Very weak fiscalist thrust by. The ice skating team of jared and dean
1." The Federal Reserve Board. The Federal Reserve has already pushed the overnight interest rate that it directly controls to zero, the lowest nominal rate it can set. However, if the Federal Reserve lowered the real interest rate (the nominal rate minus the inflation rate)—by raising the inflation rate—this could lead to increased investment and consumption. Paul Krugman and others support the idea that the Federal Reserve Board should commit itself to raising the inflation rate to 3 or 4 percent, thereby lowering the real interest rate. If businesses believe that the inflation rate will be 3 or 4 per-cent, then they will adjust their plans accordingly. For example, if they expect a 4 percent inflation rate over the next four years, this means that they expect they will be able to sell their products for 16 percent more four years from now than they do today. This will give them more incentive to invest and a willingness to pay higher wages if that is necessary to get qualified workers. The result would then be both more hiring and an inflation rate that is closer to the Fed’s target. It is questionable whether this inflation-targeting strategy could work. Japan’s central bank has re-cently tried this and seems to have been somewhat successful. Prices have stopped falling there (Ja-pan had been experiencing deflation) and have recently been rising at more than a 1 percent annual rate. This inflation rate is still less than the bank’s 2 percent target, but it is promising nonetheless. Levels of unemployment are not the gift or curse of the gods; they are the result of conscious economic policy. There seems little downside risk to this policy, but those who own debt are not anxious to see its real value eroded through inflation. In addition, there is a persistent myth that raising the inflation rate from very low levels (0 percent to 1.5 percent) to low levels (2 percent to 4 percent) is just a short step away from Weimar-style hyperinflation. The persistence of this myth makes it difficult to muster sup-port for a more aggressive Fed policy and could make it difficult to sustain even the degree of stimulus we have seen to date from the Fed."
Posted by Owen Paine at 7:14 PM