Greg Mankiw Joins the Inflation Caucus
He writes:
Greg Mankiw's Blog: The Next Round of Ammunition: The next step for the Fed is to drop the "price stability" rhetoric. The Fed has never been truly committed to stable prices.... Now that zero, or even below zero, is a possibility, the Fed needs to convince people that we are going back to the normal inflation rate of 2 to 3 percent.... Some would view this as a radical change in monetary policy. In some ways, it would be. Given how weak the economy is, however, a bit of radicalism may be called for. I am more comfortable having the Fed commit itself to modest inflation than having the federal government commit itself to a trillion dollars of new spending. The more we can rely on monetary rather than fiscal policy to return the economy to full employment and sustainable growth, the better off future generations of taxpayers will be...
But doesn't this imply an average inflation rate of more than 2% per year? That is, if we are supposed to keep the inflation rate at 2-3% per year in a depression when inflation is low, doesn't this require that inflation be 5-6% in a boom, and and average 3-4% rather than 2%?
