Menzie Chinn Explains it All for You: Demand Inflation Now!

January 3rd, 2012

Whether it’s Market Monetarist NGDP targeting (a.k.a. Damn The Inflation Rate; We Need Growth!) or Menzie’s recommendation of Conditional Inflation Targeting with a notably higher target, everything tells us that somewhat higher inflation is the current path to greater and more widespread long-term prosperity.

Raising the expected inflation rate will lower real interest rates and spur investment and consumption. It will also make it difficult for the de facto dollar peggers, such as China, to sustain their policies. The resulting real depreciation of the dollar would stimulate production of U.S. exports and domestic goods that compete with imports, boosting American production. The United States would get faster growth, an accelerated process of deleveraging, a quicker recovery, and a firmer foundation upon which to address long-term fiscal problems.

Like the market monetarist approach, Chinn’s proposal is basically for an automatic stabilizer based on unemployment levels, that anchors expectations (emphasis mine, both above and below):

a policy that would keep the Fed funds rate near zero and supplemented with other quantitative measures as long as unemployment remained above 7 percent or inflation stayed below 3 percent. Making the unemployment target explicit would also serve to constrain inflationary expectations: As the unemployment rate fell, the inflation target would fall with it.

As I said a while back:

Automatic stabilizers are the key to effective 1) policy and 2) expectation-setting. Because 1) They happen, and 2) People know they’re gonna happen. Could be fiscal or monetary, largely a question of where you inject the money.

In other words:

Demand Inflation Now! Up the Real Economy

Full disclosure: as a wealth-holder/creditor, the policy proposed here is directly contrary to my own short-term best interests. I would much prefer to see a crash in financial asset prices resulting from deleveraging and slow-growth expectations, so I could buy those assets cheap with all the cash I’m sitting on. But for whatever crazy reasons, I’d rather that my (and your) children and grandchildren spend their lives in a thriving and widely prosperous country.

Cross-posted at Angry Bear.

  1. January 4th, 2012 at 05:36 | #1

    You crazy cooter you. Who the hell do you think you are being considerate of your fellow man and thinking about their feelings and circumstances in life, Damn you to hell dude!!! Newt Gingrich is gonna send a head doctor to your door tomorrow.

    But seriously………..

    Yeah, Menzie rocks man. I got his book but ashamed to say I didn’t finish it yet. Yeah I wish all people would care more about the next generation or just their damned neighbor. But one sad truth about “Classical Economics” (and I am no fan of Milton Friedman and friends from a theory standpoint) I myself cannot deny: The overwhelming majority (NOT all in my opinion, but no doubt the majority) of people in this world are selfish. It’s human nature and I see it as a constant trait that will not change.

  2. Becky Hargrove
    January 4th, 2012 at 20:36 | #2

    I can’t bear it! You’re too accomodating!

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