domingo, 31 de marzo de 2013

domingo, marzo 31, 2013

March 28, 2013, 3:47 PM

NY Fed Paper: Lift Inflation Expectations to Boost Growth

By Michael S. Derby


 
In times like these, a rise in inflation expectations could do the economy some good, argues research published by the Federal Reserve Bank of New York.


The paper argues that when traditional forms of monetary policy, such as cutting short-term interest rates, can go no further, central bankers can goose economic activity higher if they can convince the public the future pace of inflation is likely to rise.


The paper says that if the public thinks inflation will rise, families and companies will seek to avoid the looming higher prices by spending their money now, in turn driving up growth. Importantly, New York Fed staff economists Gauti Eggertsson and Marc Giannoni, the paper’s authors, say this option is open to the Fed only in emergency circumstances.


When short-term rates hit 0%, as they currently have, “anticipated inflation is far from neutral, with output increasing if inflation is anticipated to rise,” the central-bank economists wrote.


Contrary to the common belief that inflation is less effective at stimulating output when inflation becomes more and more anticipated, the benefits of higher anticipated inflation can be extremely large” when short-term rates can be cut no further, the paper states.


The paper suggests the Fed could manipulate expected inflation via its official inflation target, which is currently fixed at 2%.


“It may be beneficial to let the near-term inflation target move over time in a way that depends on the state of the economy,” Messrs. Eggertsson and Giannoni wrote. Output and inflation can be stabilized more effectively by raising targeted inflation in the medium run,” they wrote, as long as the change occurs relatively quickly after the shock that waylaid the economy.


The paper’s findings are sure to be controversial, both within and outside of the Fed. The research was released as part of the New York Fed’s regular publication of analysis and as such, it does not indicate the central bank is about to change its policy stance.


Fed officials have said time and time again they remain committed to keeping prices stable, even as they pursue some of the most aggressive and unorthodox stimulus policies seen in the institution’s history. Burned by high inflation, surging unemployment and stagnant growth of the 1970s, the central bankers are loathe to let price pressures rise much, for fear they will spiral out of control again.


That said, the extraordinary level of stimulus seen in recent years has created widespread fear of a huge surge in inflation. Thus far, those anxieties have not been realized. Inflation continues to hold below the Fed’s official target of 2%, and most central bankers expect that to remain the case over the next few years.


What’s more, even the most dovish officials are hesitant to argue in favor of using higher inflation to spur growth. That said, a number of central bankers have argued that their target is not a ceiling, and that prices can reach more than 2% if they are expected to ebb in relatively short order.


Central bankers have also muddied the waters when it comes to their inflation-fighting commitment. Last December the Fed announced thresholds that govern the possible timing of interest-rate increases, saying rates will stay near 0% until what is now a 7.7% unemployment rate edges down to 6.5%, so long as expected inflation stays at less than 2.5%.


For some observers, the higher price threshold suggests a reduced commitment to keep prices in line with the target. One of the strongest advocates for the threshold regime, Charles Evans of the Chicago Fed, has argued that because the Fed is undershooting its mandate to promote maximum job growth, it might have to be willing to accept a modest rise in inflation above the target as the price of dealing with the unemployment problem.


Minneapolis Fed President Narayana Kocherlakota, another supporter of aggressive Fed action, has argued that the new inflation threshold is effectively a safety valve should price pressures rise unexpectedly. He noted in a speech Wednesday that even with jobless rates well under the current mark, “we have not seen a medium-term outlook for inflation as high as 2.25% over the past 15 years.”


So far, no central bankers have said it would be a good idea to intentionally drive expectations over the Fed’s target rate as a tool to create better growth. Instead, central bankers have relied on massive bond buying programs and enhanced guidance about the future path of rates to provide stimulus when it could no longer be found from more traditional sources such as short-term rates.

0 comments:

Publicar un comentario