Must-Read: Maury Obstfeld: Deflation Risks May Warrant Radical New Central-Bank Thinking
Must-Read: The asymmetry created by the zero lower bound on short-term safe nominal interest rates is not a difficult concept to grasp. The resulting optionality preserved by aiming at policies that overshoot on employment, growth, and inflation, and then dialing-back if necessary, is both important and relatively simple. Yet since the end of 2008, at every stage, this principle has been grossly neglected by economic policymakers. Hank Paulson was the last person to understand–that is why he went for $700 billion for the TARP even though he (wrongly) thought he would not need it.
Maury understands:
: Deflation Risks May Warrant Radical New Central-Bank Thinking: “I worry about deflation globally…
…It may be time to start thinking outside the box…. You can always, always deal with high inflation… [but] at the zero lower bound, our options are much more limited. In order to bring inflation expectations firmly back to 2% in the advanced countries, where we’d like to see it, it’s probably going to be necessary to have some overshooting of the 2% level, or at least to entertain that as a possibility…