Greg Ip argued that a central bank that can cause firms and workers to expect 2 percent inflation they will set prices consistent with 2 percent inflation. And so, a central bank should target inflation.
So, during the Great Moderation, did central banks create inflation expectations of 2 percent and cause firms and workers to set prices and wages so that the inflation rate remained 2 percent?
While it could be worse, I suppose, this hardly looks like prices and wages being set so that inflation remains 2 percent. It looks like a great deal of variation.
On the other hand, in the Great Moderation, nominal GDP did remain very close to a stable growth path.
Not perfect, but pretty close. Since the Federal Reserve was not explicitly targeting nominal GDP, what does this have to do with expectations? If potential output is expected to grow 3 percent, then it will take 3 percent more nominal expenditure to purchase that extra output at constant prices. If the Fed wants 2 percent inflation, then for firms to charge 2 percent more for 3 percent more output, total spending must grow 5 percent. A 5 percent growth rate of nominal GDP is needed, and so, that is what should be expected. If the Fed is credible.
Nice blogging. Good work.ReplyDelete
Can you produce these graphs in an apples-to-apples way? Either both rates, or both levels?ReplyDelete
Hard to know whether this is a striking contrast or just an artifact of the variation in presentation.
I have shown the price levels many times, and the deviations are obviously larger. However, inflation targeting isn't targeting the price level.
Similarly, the goal of targeting the growth path of nominal GDP isn't to stabilize the growth rate, but rate to stay on the growth path.
The usual way to do this comparison would be to compare "gaps" to growth rates.
Inflation is always causing of concern with trading, so it’s hard to work with guess work. I never try to guess anything as such because the risk part is just too high and that’s where we can face obvious issues. I am always careful with how I go about doing everything since only then I will be able to succeed and perform well. I get plenty of benefits and that comes with OctaFX broker and their mind blowing conditions that include small spreads from 0.1 pips, cTrader platform, cash back and much more!ReplyDelete