DeLong Smackdown Watch: Matthew Yglesias on Structural Change and Macroeconomic Vulnerability in the 1920s and Today Edition
Matthew Yglesias writes:
DeLong Smackdown Watch: Structural Change and Macroeconomic Vulnerability in the 1920s and Today Edition: I have several problems with this logic, but for starters you need to add something about a very low pre-crisis rate of inflation. (3) refers to a low real natural rate of interest to produce full employment. Had we been targeting five percent inflation rather than two percent inflation before the crisis, then nominal rates would have had three more percentage points to fall before hitting zero. To the extent that you really believe the zero bound on nominal rates constrains monetary policy, the first order conclusion ought to be that an economy needs to run a fairly high rate of (non-accelerating) inflation in order to leave room.
That is why some of us have called for a 4 or a 5%/year inflation target rather than a 2%/year one...