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.
