In a previous post, I expressed concern that the Fed was planning to move policy further away from a “level targeting” approach. One criticism of symmetric level targeting is that it may be politically unpopular to lower prices when inflation is above the central bank’s target path. A recent article in the Financial Times suggests that just the opposite may be true.
Many large central banks have implicitly returned to setting monetary policy with reference to the Taylor rule model, where interest rates are fixed to how far the economy is from its inflation target and the degree of slack in the economy. are. But these elections suggest that voters want stable price levels rather than low inflation and full employment.
If so, central banks may want to reconsider alternative policy frameworks. The idea of price level targeting was proposed by Professor Michael Woodford of Columbia University. In this framework, policy targets a constant increase in the price level over time, so if prices rise above that level, policy responds sufficiently to reverse the discrepancy in price levels. There is a need. This contrasts with the current framework, which allows us to celebrate a return to 2% inflation even though the target has not been met for years, leaving households with a significant loss of real purchasing power. It is. This framework could theoretically benefit consumers by encouraging early action that limits initial deviations from desired price levels.
Care must be taken when interpreting the election results. If a return to high unemployment is confirmed, voters may start to care more about the unemployment rate than about rising prices. But I don’t see a trade-off here. NGDP level targeting policy, or even true “flexible average inflation targeting” policy (not the one adopted by the Fed), would result in both more stable prices and more stable employment in the long run. After all, what is politically popular is economic success.
