Should-Read: Nouriel Roubini: The New Abnormal in Monetary Policy

Should-Read: Explain to me, please? What is a BIS that thinks the inflation target should be zero thinking? What are central banks that are not desperately striving to gain more sea room right now thinking?

Nouriel Roubini: The New Abnormal in Monetary Policy: “Financial markets are starting to get rattled by the winding down of unconventional monetary policies in many advanced economies… <https://www.project-syndicate.org/commentary/unconventional-monetary-policy-new-normal-by-nouriel-roubini-2017-07>

All of these central banks will have to reintroduce unconventional monetary policies if another recession or financial crisis occurs…. Even if the Fed can get the equilibrium rate back to 3% before the next recession hits, it still will not have enough room to maneuver effectively. Interest-rate cuts will run into the zero lower bound before they can have a meaningful impact on the economy. And when that happens, the Fed and other major central banks… first could restore quantitative- or credit-easing policies… second… could return to negative policy rates… third… could change their target rate of inflation from 2% to, say, 4%….

The last option for central banks is to lower the inflation target from 2% to, say, 0%, as the Bank for International Settlements has advised. A lower inflation target would alleviate the need for unconventional policies when rates are close to 0% and inflation is still below 2%. But… zero inflation and persistent periods of deflation–when the target is 0% and inflation is below target–may lead to debt deflation… debtors could fall into bankruptcy…