Afternoon Must-Read: Kevin Drum: Are Central Banks Losing Their Credibility on Inflation?
…which have persistently undershot their own inflation targets despite having enormous incentives to at least meet them as they try to recover from the Great Recession…. Everyone has assumed all along that if they were sufficiently motivated, central banks could always generate high inflation…. But what if it turns out that in practice it’s all but impossible for a modern central bank to meet even a modest inflation target during a severe economic downturn? How do we know whether this is due to lack of will; lack of technical firepower; or lack of political support? And how long does it take before markets decide it doesn’t much matter? After all, at some point there’s no practical difference between unwillingness and inability…. The longer this goes on, the more their credibility gets shredded. It’s a mystery why this isn’t an issue of bigger concern.