For a post today, I thought it would be helpful to summarize many of things that relate to my objections to inflation targeting that I’ve discussed in detail on my blog over the last couple of years along with some of the more deceptive excuses for why inflation targeting is regarded as superior to not adopting another method. I hope you enjoy reading it as much as I’ve enjoyed writing it.

Major perverse incentives:

  • Throwing the baby out with the bath water – tightening during a negative supply shock, wholesale sacrifice of financial/political stability to hit the target
  • To maintain monetary disequilibrium that prevents a rebound from recession (wouldn’t want inflation to rise above target, which it temporarily would)
  • Relies on sticky wages and the unemployment lever to adjust demand – the stickier the wages, the more severe and persistent the unemployment
  • Caps economic growth below potential
  • Fear of inflation expectations becoming unanchored is justification to forgo a recession rebound (takes us down and leaves us there)
  • [Update: Prevents consumption from maintaining employment levels when investment declines]

Inflation targeting is politically palatable only on deceptive terms that dislodge the central bank from accountability regarding the economic effects of choosing an inappropriate nominal target to defend at all costs (some of these are real whoppers):

  • There is some benefit to controlling inflation regardless of source by monetary means
  • Repealing menu costs outweighs the cost to society from using unemployment to control demand; and menu costs aren’t associated with disinflation
  • Inflation targeting provides more certainty for more accurate financial planning
  • Below target inflation and disinflation is price stability while above target inflation is not
  • Inflation targeting is consistent with Fed mandates
  • Sudden bursts of currency appreciation makes everyone richer overnight without working for it
  • Inflation is theft/taxation that hurts average people and monetary-induced deflation isn’t/doesn’t
  • The central bank isn’t responsible for shifts in headline unemployment
  • Restoring monetary equilibrium allows politicians/governments to behave irresponsibly and it’s the job of unelected bureaucrats to dictate to elected officials, especially Congress (That’s in the Constitution??)
  • Restoring monetary equilibrium threatens the independence of the central bank (an independent central bank is in the Constitution?)
  • An independent/discretionary central bank is necessary to maintain currency confidence that everyone benefits from
  • Asset bubbles originate from loose monetary policy and not bad supply side policy (the people and economic freedom are highly fallible, not government)
  • There is a benefit to society in exchanging employment opportunities and potential productive endeavors in order to control bubbles
  • Economic freedom is a very dangerous thing – people can’t be trusted with their own money so monetary policy should be bias toward tight – they won’t miss what they will never have

PS: Why is the Fed still doing this and trying to sell it like the Emperor’s new clothes? More importantly, why it is still getting away with it??

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