Friday, February 12, 2010

Reorienting macroeconomic policy

Thanks to Free Exchange:

Check out:
IMF Explores Contours of Future Macroeconomic Policy

Perhaps the most interesting quote (NB for IB2 candidates ready to sit the May exam):
IMF survey online: Central banks have chosen low inflation targets, around 2 percent. In your paper, you argue that maybe we should revisit this target. Why?

Blanchard: The crisis has shown that interest rates can actually hit the zero level, and when this happens it is a severe constraint on monetary policy that ties your hands during times of trouble.

As a matter of logic, higher average inflation and thus higher average nominal interest rates before the crisis would have given more room for monetary policy to be eased during the crisis and would have resulted in less deterioration of fiscal positions. What we need to think about now if whether this could justify setting a higher inflation target in the future.

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