Thursday, May 17, 2012

Simon Wren-Lewis on Monetary Policy - "the status quo is not looking too good right now."

Here again monetary policy makers appear content with an outcome involving roughly on target inflation and a large negative output gap. In other words, they seem happy not to maximise social welfare.
            It is of course interesting to speculate why this is. Perhaps it is, as John Kay suggests, an obsession with credibility, involving a misreading of the theoretical literature. Perhaps they suspect, like Chris Dillow, further QE will be ineffective, so there is nothing they can do. (But if it is that, they should say so.) Perhaps it is because policymakers are really serving particular economic interests, as Steve Waldman suggests. Perhaps Rogoff was right, and central bankers really are ‘conservative’, in the sense of caring much less about unemployment than the rest of society. But whatever it is, it is not producing good policy for society as a whole. So we should think about moving to a monetary policy target that better reflects social costs. Maybe, as Britmouse in the UK and many others elsewhere suggest, that is a nominal GDP target, or maybe it is something else, but the status quo is not looking too good right now.
Read it at mainly macro
Inflation targeting is not working
By Simon Wren-Lewis

I don’t often agree with Wren-Lewis about causes of the crisis or policy prescriptions but this short piece offers an array of viewpoints on an important topic. Current central bank policy of inflation targeting has not been the panacea for economic growth and full employment that many once thought. As for why central bankers appear complacent, I think some combination of the above four perspectives is a pretty good approximation.

(Note: Several of the links above have been previously provided on this site but all are well worth reading.)

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