Academic journal article ABA Banking Journal

Price Stability-Time for a Lower Limit?

Academic journal article ABA Banking Journal

Price Stability-Time for a Lower Limit?

Article excerpt

Lackluster economic growth, nonthreatening inflation, large balance sheets, and fiscal austerity in several major economies have left central bankers with a tough challenge. Consequently, some are suggesting the unthinkable: tolerance of higher inflation may create a path to self-sustained expansion. A recent New York Times article cited Professor Kenneth Rogoff's recommendation of 6% inflation for the United States to pull out of the soft-growth quagmire.

This, in our opinion, is an unsuitable alternative. Guiding markets to understand that inflation exceeding the current target is a temporary strategy and designing monetary policy to get the economy back on track from the elevated inflation path are simply bridges too far.

Our concern is more on the other side. Should there be a targeted range for inflation that includes some minimum guidance level? With price level increases falling in many parts of the world, this idea deserves consideration as well.

Currently, the Federal Reserve has a dual mandate of price stability and full employment, while price stability is the single obligation of most other major central banks. Operationally, the price stability mandate translates into maximum inflation readings, with ranges built in to allow some flexibility.

Essentially, these major central banks have crafted asymmetric price stability mandates, with concern only on the upside. Yet deflation was a legitimate threat in the United States following the financial crisis in 2008 and again in 2010. These situations led to the first two rounds of large-scale asset purchases. …

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