Pages

 

Inflation Targeting Gets Another Black Eye

0 comments
Inflation targeting just got a black eye in the United Kingdom.  Now its about to get another one as the European Central Bank (ECB) President Jean-Claude Trichet signaled interest rates will probably be increased in April.  As was the case in the United Kingdom, the motivation for this move is concerns about maintaining the central bank's  inflation target.  And like the United Kingdom too, the inflation concerns are not warranted given that core inflation is low and inflation expectations remained well anchored according to the ECB.*  Morever,  aggregate spending is still well below any reasonable trend.  For example, the figure below shows Eurozone nominal GDP is below its 1995-2004 trend.  (This time period is chosen to show that nominal GDP is still below trend even after accounting for the housing boom run-up in spending.)  


As Kantoos notes, all of these facts mean that tightening monetary policy in  April  makes no sense.  Especially if the ECB wants to prevent a crackup of the Eurozone.   The Eurozone is  not an optimal currency area and inflation targeting is about to make that even more apparent.   This will definitely be another black eye for inflation targeting.


*The ECB reports in its February, 2011 Bulletin the following on page 54: "Inflation expectations over the medium to longer term continue to be firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term."

0 comments:

Post a Comment

  • Greenspan's Cult of Personality... Review topics and articles of economics: Alan Greenspan was a legend in his time and there was no shortage of praise for him back then. For example, who can forget Bob Woodow's 2000 book Maestro: Greenspan's...
  • Yes Tyler, Low Interest Rates Matte... Tyler Cowen is wondering whether the Fed's low interest rates in the early-to-mid 2000s really were that important to the credit and housing boom of the early-to-mid...
  • The Eurozone Crisis: Deja Vu... Review topics and articles of economics: Randal Forsyth sees similarities between the current unfolding of the Eurozone crisis and that of the U.S. financial crisis a few years back:Just as the problem on this...
  • Charles Plosser and the Burden of F... The Economist's Free Exchange blog is shocked to hear this from Federal Reserve Bank of Philadelphia President Charles Plosser:"Since expectations play an important role...
  • Arnold Kling and Expected Inflation... Review topics and articles of economics: What do we know about expected inflation? According to Arnold Kling not much if we look to financial markets:I'm also not convinced that we can read expected inflation...
  • A Paper on Stabilizing Nominal Spen... Given the recent discussion on stabilizing nominal spending as a policy goal I found this article by Evan F. Koenig of the Dallas Fed to be interesting: The article...
  • Why The Low Interest Rates Mattered... Review topics and articles of economics: This is the second of two posts detailing why the Fed's low interest rate policies in the early-to-mid 2000s was one of the more important contributors to the credit and...
  • Why The Low Interest Rates Mattered... This is the first of a two-part follow up to my previous post, where I argued that the Fed's low interest rate policy was a key contributor to the credit and housing...
  • The Stance of Monetary Policy Via t... Review topics and articles of economics: There has been some interesting conversations on the stance of monetary policy in the past few days between Arnold Kling, Scott Sumner, and Josh Hendrickson. Part of...
  • Scott Sumner's New Best Friend:... Joseph Gagnon is calling for $6 trillion more in global monetary easing. This should not be too hard to implement since the Fed is a monetary superpower.Update: The...
 
Review topics and articles of economics © 2011 Inflation Targeting Gets Another Black Eye