With this historical observation in hand, it seems a short leap to turn Wren-Lewis’s thought experiment on its head. Arguably, the last several years have demonstrated that nonconventional policy actions have been quite successful at short-circuiting the disinflationary spirals that pose the central downside risk when interest rates are near zero. (If you can tolerate a little math, a good exposition of both theory and evidence is provided by Roger Farmer.)
On the opposite side of the ledger, we know little about the conditions that would cause the Fed to lose credibility with respect to its commitment to its inflation goals, and very little about the triggers that would cause inflation expectations to become unanchored. Thus, I think it not difficult to construct a plausible argument about the risks of being wrong about the output gap that is exact opposite of the Wren-Lewis conclusion.Read it at EconoMonitor
Is Inflation Targeting Really Dead?
By David E. Altig
Yesterday I offered Wren-Lewis' take on Frankel's article and the need to change the status quo in monetary policy. Apparently there are still respectable minds that don't foresee any large issues with current policy or don't believe other options are any better. The Fed has been effective in preventing sustained disinflation but the resulting asset and commodity inflation has not necessarily been positive for growth. Where I agree with Altig is regarding the risks of employing NGDP targeting as an alternative. While the status quo isn't great, it may be the best among current alternatives.