Tuesday, February 16, 2010

The IMF Doesn't Like Inflation Any More than the Finance Ministers Who Run It

. Tuesday, February 16, 2010

Some IPE bloggers seem to be reading a lot into a recently-released IMF Staff Position Note. In this note, IMF chief economist Oliver Blanchard and his co-authors consider the lessons we might draw from the recent crisis about the pre-crisis consensus on macroeconomic policy. One lesson he suggests is that a slightly higher inflation target (4 rather than 2 percent) might make it easier to cut rates in the face of large negative shocks. Let me quote the relevant section at length:

The crisis has shown that large adverse shocks can and do happen. In this crisis, they came from the financial sector, but they could come from elsewhere in the future—the effects of a pandemic on tourism and trade or the effects of a major terrorist attack on a large economic center. Should policymakers therefore aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks? To be concrete, are the net costs of inflation much higher at, say, 4 percent than at 2 percent, the current target range? Is it more difficult to anchor expectations at 4 percent than at 2 percent?
Achieving low inflation through central bank independence has been a historic accomplishment, especially in several emerging markets. Thus, answering this question implies carefully revisiting the list of benefits and costs of inflation (page 11).
Maybe I am missing subtlety (subtlety has never been my strong suit), but I don't see how one gets from these paragraphs to Erik Voeten's assertion that the IMF's "Chief Economist calls for countries to raise their inflation target to 4 percent."

Nor do I see how James Vreeland (welcome to the blogosphere, James) can assert that Blanchard has called for monetary authorities to raise their inflation target and cite (I can only infer approvingly) the Financial Times' claim that this "represents a dramatic shift away from the standard policy advice of the IMF." (Though I highly recommend the rest of Vreeland's post on the evolution of IMF conditionality).

Nor, even if this interpretation is correct, do I see why this is hypocritical. What I see is exactly what one hopes to see. Reflective people drawing lessons from major historical events. Lord Keynes' ideas for the IMF emerged from his reflections on the lessons of the Great Depression. In that context, it made sense to prioritize the fight against deflation. Central bankers embraced a two-percent inflation target based on lessons of the Great Inflation. In this context, it made sense to prioritize the fight against inflation. The world throws new challenges at us, and we reflect and adapt. And then the world throws new challenges at us. Shouldn't we welcome indications that policymakers are reflecting and possibly adapting?


The IMF Doesn't Like Inflation Any More than the Finance Ministers Who Run It




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