For The First Time Ever, Bank of Japan Says It Wants Inflation by Yglesias


Big News: Japan Targets Higher Inflation by Dean Baker

Japan's central bank took the extraordinary move of targeting a higher rate of inflation, setting a 1.0 percent inflation target. This should have been front page news.

The idea of a central bank setting an inflation target above its current level, in the hope of raising inflationary expectations, dates back to a paper by Paul Krugman in the late 90s. (Federal Reserve Board Chairman Ben Bernanke endorsed the same policy when he was still a professor at Princeton.) The logic is that if the central bank can credibly commit itself to a higher inflation target then the commitment could create self-fulfilling expectations. Businesses would invest and consumers would spend based on the expectation of higher inflation, which would mean a lower real interest rate. The increased business activity would then lead the inflation targeted by the bank.

This decision by the Japanese central bank will provide an opportunity to test whether such targeting can work. If it proves successful, it may lead to more pressure on other central banks (like the Fed) to go this route.

Again with Potential Output by Tim Duy

In Bullard's model, the housing bubble popped, and millions of people who were employed are no longer employed, nor should we expect them to be employed (or to reenter the labor force) as there is no way to do so absent another bubble. This seems to me an obvious place for fiscal policy and monetary policy to step into the breach and compensate for the lost demand. That millions of people's labor and output be lost simply because they no longer believe that housing prices don't always rise is a gross waste of resources.

You can tell a story in which that bubble-driven demand was necessary to compensate for negative equilibrium interest rates for risk free assets (driven by excessive saving by Asian central banks and aging demographics in the developed world). Rather than wait for another asset bubble to come along and lift demand, or twiddle your thumbs hoping another recession doesn't hit while you are at the zero bound, you could pull out the old-Bernanke playbook and implement an even more aggressive mix of fiscal and monetary policy to compensate for the lost demand and flood the world with risk free assets.

Mind the Gap by Menzie Chin

Bullard On Duy On Bullard On Potential Output by Barkley Rosser

Duy on Bullard on Duy on Bullard on Tinker to Evers to Chance by Krugman

It seems to me that Bullard has shifted his position. In the first version, which I discussed here, Bullard seemed to be arguing that the wealth loss from the burst bubble represented a real destruction of economic capacity. Now he seems to be making a quite different case: that the economy in 2005-2007 was operating at an unsustainably high rate of capacity utilization, driven by the bubble.

I don’t buy this version either.

One reason not to buy it is the reason Duy cites: if the economy was so overheated in the mid-naughties, where was the inflation? Where were the labor shortages?

But there’s another reason I don’t believe it: demand in the mid-naughties was not, in fact, at fever pitch.

Yes, we had very residential construction and high consumer spending. But we also had record-high trade deficits, so that overall demand wasn’t that vigorous, after all....

Link from yesterday, Ben Bernanke and the Zero Bound by Laurence Ball

In his Tokyo speech in May 2003, Bernanke was still urging aggressive policies at the zero bound. By July 2003, as we will see, he was ignoring most of his previous ideas and proposing more cautious policies. What explains this sudden change? The obvious answer, at one level, is that Bernanke was influenced by the FOMC meeting of June 24.

At the time of this meeting, Japan had been stuck at the zero bound for four years, and the United States was experiencing its deflation scare. In that setting, the meeting began with abriefing by Vincent Reinhart, Director of the Board’s Division of Monetary Affairs, called “Conducting Monetary Policy at Very Low Short-Term Interest Rates.” Reinhart outlined possible policies to “provide impetus to the economy” if the federal funds rate reached zero. After Reinhart spoke, Dino Kos, head of the trading desk at the New York Fed, described some details of implementing Reinhart’s ideas. A week earlier, FOMC members had received outlines of the Reinhart and Kos briefings in bullet-point form. [emphasis added.]

When they deign to discuss the bubble and financial crisis, conservatives point to Fannie and Freddie or point to Greenspan keeping rates too low too long. Well in 2003 they are facing deflation! Bernanke seems concerned about avoiding deflation rather than maintaing full employment.

I can find only one occasion between 2004 and 2009 when Bernanke discussed policies at the zero bound. His comments were a response to a written question from Senator Bunning of Kentucky during Bernanke’s 2005 confirmation hearings. Bunning was the only Senator to vote against Bernanke’s first confirmation as Fed Chair. Bunning’s question is motivated by Bernanke’s reference to “helicopter drops” in his 2002 speech on deflation. Bunning notes that Bernanke has earned the nickname “helicopter Ben” and asks, “Would you like to elaborate on your comments on deflation?” In answering, Bernanke recalls the 2002 speech:

I noted that one possible tool for combating deflation, a money-financed tax cut, was essentially equivalent to a theoretical construct used by Professor Milton Friedman, a “helicopter drop” of money. Of course, the “helicopter drop” metaphor is purely a pedagogical device to help explain money’s role in the economy, not a practical policy tool. A key message of my speech was that, contrary to some views that were being expressed at the time, the central bank still has the tools to address deflation even if the short-term interest rate reaches zero.

Bunning was one of the dumbest Senators around. Mitch McConnell hated him.