Apparently the IMF's chief economist Olivier Blanchard is now encouraging countries to target a higher inflation rate of, say, 4% in order to help countries deal with macroeconomic problems.
Now, I suspect that Mr. Blanchard is a very bright fellow, but this idea is just crazy.
Let's start with the obvious: what kind of policy deliberately depreciates the value of the currency for savers? A 4% annual inflation rate means more than 40% less purchasing power 10 years from now - is this supposed to help citizens save for their retirement?
Next, what does this insane policy mean for interest rates? If you know that inflation is going to be running at 4% or higher, how high of a yield will you demand to compensate?
(I can only imagine what the Chinese government - owners of over $2 trillion in US government bonds - must think of this idea).
Finally, does Mr. Blanchard's team really think that monetary policy can be tweaked to such a degree that inflation could be targeted at 4%?
I could go on, but you get the idea.
No wonder people are losing faith in governments around the world.
Here's an excerpt from the piece; full length follows:
IMF Tells Bankers to Rethink Inflation
The International Monetary Fund's top economist, Olivier Blanchard, says central bankers should consider aiming for a higher inflation rate than they do currently to lessen the chances of repeating the recent severe recession.
Mr. Blanchard, a macroeconomist on leave from the Massachusetts Institute of Technology, said the global economic downturn revealed flaws in macroeconomic policy, especially the reliance primarily on interest rates to manage economies. Although Japan had fallen into a decade-long funk despite low inflation and low interest rates, "most people convinced themselves that the Japanese didn't know what they were doing," Mr. Blanchard said in an interview.
In a new paper with two other IMF economists, Giovanni Dell'Ariccia and Paolo Mauro, Mr. Blanchard says policy makers need to consider radically different approaches to deal with major banking crises, pandemics or terrorist attacks. In particular, the IMF paper suggests shooting for a higher-level inflation in "normal time in order to increase the room for monetary policy to react to such shocks." Central banks may want to target 4% inflation, rather than the 2% target that most central banks now try to achieve, the IMF paper says.
At a 4% inflation rate, Mr. Blanchard says, short-term interest rates in placid economies likely would be around 6% to 7%, giving central bankers far more room to cut rates before they get near zero, after which it is nearly impossible to cut short-term rates further.
"Now we realize that if we had a few hundred extra basis points"—a basis point is one-hundredth of a percentage point—"to rely on, that would have helped" fight the recent downturn, Mr. Blanchard says. "So it would have been good to start with a higher nominal rate. The only way to get there is higher inflation."