Today’s Must-Must-Read: Paul Krugman: The Missing Deflation and the Argument for a Higher Inflation Target
…so were many of us, and we treated it as a problem to be solved. And what emerged as at least one likely culprit was downward nominal wage rigidity, which has been overwhelmingly obvious in recent years…. The case for a higher inflation target… rests on the… two zeroes: it’s very hard to cut interest rates below zero… to get cuts in nominal wages. Both problems are… more… serious… for the economy with… 1 percent… than with 4 percent inflation. Economists and central bankers were aware of the two-zeroes problem back when they converged on the 2 percent inflation target. That’s why the target was 2, not 0. But they wrongly believed that 2 was enough…. What we’ve learned since then is that the zeroes are a much bigger issue than the consensus had it…. The failure of inflation to fall as much as predicted in 2009 was part of a series of events that were trying to tell us that the initial inflation target was too low.