IMF Chief Economist Olivier Blanchard Speaks Delphicly on the Appropriate Inflation Target

I interpret this as IMF chief economist Olivier Blanchard saying, as clearly and straightforwardly as his office allows him to, that in his judgment the 2% per year inflation target is past its sell-by date and rotted, and that the North Atlantic economies need to move to a 4% per year inflation target in order to reduce the risk of another 1932, or another 2010.

What do you think?


Olivier Blanchard:
Monetary Policy Will Never Be the Same

We have discovered… at great cost, that the zero lower bound can indeed be binding… for a long time…. Even then… unconventional policy can systematically affect the term premia, and thus bend the yield curve through portfolio effects. But… the effects of unconventional monetary policy are very limited and uncertain.

There is therefore much to be said for avoiding the trap….. If inflation had been 2 percentage points higher before the crisis, the best guess is that it would be 2 percentage points higher today, the real rate would be 2 percentage points lower, and we would probably be close in the United States to an exit from zero nominal rates today.

We should not dismiss the possibility, raised by Larry Summers that we may need negative real rates for a long time…. We are still facing today the danger of an adverse feedback loop, in which depressed demand leads to lower inflation, lower inflation leads to higher real rates, and higher real rates lead in turn to even more depressed demand…

While I agree with the position I impute to the bare-Olivier particle after correcting for the shielding effect of the cloud of virtual particles of bureaucratic protocol, there is one remaining issue that bothers me. I am certain that North Atlantic central banks could not target and maintain a 10% per year inflation rate without massive and destructive financial repression: If it tried, shadow banks that offered liquid claims on baskets of storable commodities’97either broad baskets or narrow baskets, cough, gold’97would eventually annihilate the fiat dollar-based commercial banking system. But what about the stable 4% per year inflation target? Is that vulnerable to the same attack? Perhaps the tipping point is that an inflation target is sustainable as long as it carries with it a positive real yield on long-term government held to maturity.

But this issue, and the Gorodnichenko worry that perhaps we should take price stickiness as an indicator of a high utility cost of lack of nominal fixity, are still, small voices whispering in my ear that perhaps my advocacy of a 4% per year inflation target is misjudged.

Perhaps it would be better to think about how to mobilize the appropriate risk-bearing capacity of society and so reduce risk spreads rather than focusing on making the safe nominal rate negative? I mean, I have the standard lefty love for the idea of the euthanization of the rentier. But that does not make it the best technocratic policy.

472 words…