On Scott Sumner’s blog today, Saturos posted a link to a blog post by David Romer who attended the recent macroeconomic conference held by the IMF. Intrigued by the quote included, I clicked on the link to have a look.
The point of the post was to go over what was discussed and what Mr. Romer believes was missing. My interpretation of it is that he believes what was discussed was interesting, but some major points of reform were passed over. His assessment of possible reforms in the area of macroeconomic policy is thus:
Concerning monetary policy, inflation targeting appeared to be a wonderful framework for its first fifteen or twenty years. But we have now had an extended period where it has shown itself incapable of providing aggregate demand at the level that is widely recognized to have been needed. So it seems important to think about whether we should have a different framework for monetary policy. But again, progress has been minimal. The idea of targeting a nominal GDP path has been mentioned on and off for a few years, but the debate has not proceeded to serious quantitative analysis of its costs and benefits and of whether it could make the economy substantially more resilient. And other ideas for significant changes in the monetary policy framework have been discussed even less.
In my opinion, there is far too much focus on the financial system, the main thrust of the IMF economic conference; and Mr. Romer is far too gentle regarding the vulnerabilities of inflation targeting, leaving dormant in his syllabus the possibility that inflation targeting is what turned an economic complication into a complete global disaster.
It would be beneficial for sake of public debate for questions about inflation targeting to be raised beyond the sense of whether it provides the tools to cope with the aftermath of crisis to the role it played in the development of the crisis to provide answers about why a complication grew into a calamity that continues unabated.
The basics of the AS/AD model can explain most of the problem considering a series of oil price shocks that occurred between 2004 and 2007; and there is only vague ability to disentangle price movements related to rising energy costs, if it was even attempted. During the same time period is when foreclosures began to rise to above average levels, and NGDP had only a quarter or two at trend in 2005-06 before it started to decline. I do not deny that there were problems in the mortgage finance model, but these points certainly do not help the case for inflation targeting in validating the supposed benefits thereof. This is an important aspect of the crisis that is continually hidden from view of broad public audience, an audience that appears to be continually taken advantage of intellectually while financial institutions are scapegoated.
White it appears that Mr. Romer is interested in some form of the concept of NGDP targeting as a replacement for inflation targeting, certainly a step in the right direction for the cause, the very tiny bit of information included here is not very effective. And unfortunately, Mr. Romer missed an opportunity to help solve the crisis by declining to point out aspects of inflation targeting involved in fueling the crisis that, at least to me, are plainly obvious and would be far more effective in advancing the debate about why reforms of monetary policy are gravely needed.