Gov. Mishkin for low but not too low inflation
In a speech at Virginia Association of Economists at the campus of Washington & Lee University in city of Lexington, Virgia, Governor Mishkin suggested that central banks must focus their inflation goal on a specific point objected rather than a range of inflation points, which he labels as "comfort zones." He argues that inflation must be low but not too low, i.e. zero or below, because zero-inflation policy might cause nominal wage problems, deflated nominal household/business value, rise in real "indebtness", lesser lending, and finally prevent central banks from handling "contractionary shocks" by reducing real interest rates to a level less than the inflation rate, and thus causing the economy to "exhibit greater volatility of economic activity and inflation." Instead, Governor Mishkin prefers an inflation rate between 1% and 2%:
Governor Mishkin then presents a set of theories on how central banks can architect their inflation objectives, preferring midpoint or specific point objective for inflation rates over "conform zones" rates, range of acceptable inflation rates. He argues that comfort zone policies, or range of inflation rates, can a) create confusion in the market in terms of understanding the monetary policy objectives, b) might generate large fluctuations especially when the Fed does not act regardless of the whether the inflation rate falls within the comfort zone, and c) cause "nonlinearities in the conduct of monetary policy" and thus negative economic outcome if the central banks focuses on the "boundaries of the comfort zone". Instead, he suggests a mid-point objective for targeting inflation rate, because a)it creates a "clarity" in communicating monetary policies, b) it narrows the objectives by targeting a single rate rather than a range of rates, and c) it minimizes the probability for the rate to fluctuate from its mid point, since the central bank will actively seek to bring the rate back to its midpoint. He then presents a presents a set of real-life examples from New Zealand, United Kingdom, Eurozone, and Canada that targeted a midpoint or provided a specific point objective for their inflation rate.
Governor Mishkin concludes by wishing that the United States and the Fed can take his suggestions into consideration, as part of the "work in progress" by the Fed in "looking for ways to improve the accountability and public understanding of U.S. monetary policymaking".
note: I thank Billy Kinsley, member of the Virginia Association of Economists (VAE), for catching a mistake in my blog regarding the location of the event.
...given shocks like those seen over the past several decades, an average inflation rate higher than about 1 percent substantially reduces the frequency with which the economy hits the zero lower bound. An inflation objective of about 2 percent implies that monetary policy is rarely constrained by the zero lower bound and thereby minimizes the adverse consequences for macroeconomic stability.
Governor Mishkin then presents a set of theories on how central banks can architect their inflation objectives, preferring midpoint or specific point objective for inflation rates over "conform zones" rates, range of acceptable inflation rates. He argues that comfort zone policies, or range of inflation rates, can a) create confusion in the market in terms of understanding the monetary policy objectives, b) might generate large fluctuations especially when the Fed does not act regardless of the whether the inflation rate falls within the comfort zone, and c) cause "nonlinearities in the conduct of monetary policy" and thus negative economic outcome if the central banks focuses on the "boundaries of the comfort zone". Instead, he suggests a mid-point objective for targeting inflation rate, because a)it creates a "clarity" in communicating monetary policies, b) it narrows the objectives by targeting a single rate rather than a range of rates, and c) it minimizes the probability for the rate to fluctuate from its mid point, since the central bank will actively seek to bring the rate back to its midpoint. He then presents a presents a set of real-life examples from New Zealand, United Kingdom, Eurozone, and Canada that targeted a midpoint or provided a specific point objective for their inflation rate.
Governor Mishkin concludes by wishing that the United States and the Fed can take his suggestions into consideration, as part of the "work in progress" by the Fed in "looking for ways to improve the accountability and public understanding of U.S. monetary policymaking".
note: I thank Billy Kinsley, member of the Virginia Association of Economists (VAE), for catching a mistake in my blog regarding the location of the event.
Labels: finance, united states
