Comment of the Day: : What Is the Free-Market Solution to a Liquidity Trap? Higher Inflation!: "Your treatment lays out the essential economics extremely well...
...Should I think that a decent policy framework for the (conservative) Central Bank is a price level target? Let's start with 2007, and use as the base core PCE. Grow that by 2% a year, and assume that would be the target level for 2015. Overall (and core) PCE looks like it will be a full 3 1/2% under that level for the year as a whole. If there had been credible expectations that we would be on that path, wouldn't that have kept real rates lower and generated a more robust recovery?
The usual argument against a price level (as opposed to an inflation) target is that it is "complicated." Some of that may be memories of the old money supply targets, when there were all sorts of adjustments to the base from which the target grew. Granted, there may be some similar (but milder) problems when the PCE is used as the target, but that problem would not be there if the target was, say 2 1/2% growth in the CPI. In any event, I doubt that the financial markets would find it more difficult to understand a price level target (it's possible some of the public might).
