Sunday, June 24, 2012

Immorality of Inflation Targeting

Steve Waldman has an excellent post about the immorality of stabilizing the price level or inflation rate.    However, it is important to emphasize that his argument only applies to using shifts in aggregate demand to offset shifts in aggregate supply.   It isn't saying that it is immoral to have a stable trend price level or inflation rate.  And, as he emphasizes, there is nothing wrong with avoiding or reversing shifts in the price level or inflation rate due to changes in aggregate demand.

The argument about the undesirability of offsetting aggregate supply shocks was made (with less moral force, I think) by George Selgin in Less Than Zero.   While I don't find George's argument for a mild deflationary trend convincing, he did convince me long ago to give up on price level stabilization because of the undesirability of using monetary disequilibrium to reverse the impact of aggregate supply shocks on the price level.

David Eagle has also provided an analysis of the risk sharing implications of price level stabilization.  

This is one of the reasons shy Market Monetarists favor nominal GDP targeting rather than price level or inflation targeting.  


  1. While I can see the theoretical advantages of NGDPLT over ILT I have a question about the practicality of NGDPLT in a free banking world.

    Selgin in TFB shows that in a commodity money FRB regime NGDP will tend to be stabilized with the need for a CB to aim for a target. Hayek, in the Denationalization of Money, talks about something slightly different from this - competing non-commodity currencies. He suggests that under such a regime the various money suppliers would likely target price level stability (they would choose a bundle of goods to target to achieve this). As you have pointed out he acknowledges that such targeting would be somewhat distortionary (for the reasons given in LTZ) but feels these distortions would be minor.

    Do you see any merit in Hayek's ideas in that book ? If so, do you agree that if competing banks targeted Price Level that this would indeed be a minor issue ? And finally, can you see any way that NGDP could be explicitly targeted in a competing currencies world ?

  2. Should say "without the need for a CB to aim for a target"

  3. In addition to Rob's great question asked isn't true that Scottish free banks produced mind deflation?

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