I got a chance to read Ben Bernanke’s proposal for temporarily using price level targeting at the ZLB. Before I get into my thoughts about the proposal, I’d like to say that, at its worst, following this proposal is better than doing nothing for the following reasons:
- It avoids inflation terminology and possibly political problems associated with doing the right thing under an inflation rate targeting regime
- It makes up for gaps in the price level trend and may provide better support for a quicker recovery
I wouldn’t venture into putting words into Bernanke’s mouth, but it seems like proposing for a price level target to be implemented temporarily at the ZLB may have something to do with the with the politics involved in getting the FOMC to change its policies baby steps at a time. Starting with convincing them to change the policy when it is absolutely needed to avoid the sort of political punching bag syndrome experienced by the Fed during the Great Recession.
With this in mind, I’d expect it to fall short of optimum, allowing room for members of the FOMC to improve upon it themselves. While this is a better approach to recovery over the practices and approaches used in 2009 and beyond, it appears more along the vein of what to do after the house has burned down. Since I’ve never bought on to the idea that reaching the ZLB is unavoidable, and I believe that allowing the ZLB to bind is enormously damaging and costly, it seems like a prevention plan to avoid the ZLB would better serve the public good. I want fire hoses to put the fire out before the house burns to the ground, not a plan to rebuild after everything of value has been destroyed. It simply is not consisted with Friedman’s principle of policy development to leave everyone better off.
While I agree somewhat in principle with Bernanke’s proposal, I still can’t seem to wrap my head around the need to discuss the cost of inflation. It might be short hand for alluding to the cost of inflation volatility he is using here because comparing and contrasting any supposed cost of inflation when maintained in a stable state to allowing the ZLB to bind appears to be reasonable to assume that stabilizing inflation at any level would cost much less in terms of wellbeing.
And this is, of course, why I don’t believe that too high too fast is ever a rational way of dealing with what may be perceived as a problem of too low too long, especially when available data point to historically high credit utilization. The simple point being that we really need to stop employing policies that are well established in theory to produce a house fire, like tossing lit matches into a basement full of kindling, and figure out how to solve problems in a way that leaves everyone better off.