MCViewPoint

He said that this fallacy stems from the god complex of some economists and the desire to make economics more like physics

The value of money shouldn’t be stabilized because there is nothing stable about a healthy, progressing, dynamic economy. Consumer preferences, technology, natural resources, and a million other variables are constantly changing,

https://mises.org/wire/what-right-inflation-target-central-banks

Jonathan Newman

Why have central banks settled on a 2 percent price inflation target? Project Syndicate asked four economists about this target and whether it is still appropriate. I’ll summarize their answers and then consider Mises’s position on “stabilization policy.”

Four Economists’ Answers to “Is 2 Percent Really the Right Inflation Target for Central Banks?”

Michael Boskin, Stanford University professor, Hoover Institution senior fellow, and former chair of the Council of Economic Advisers to George H.W. Bush, concludes that 2 percent is probably about right, mainly due to the negative consequences of a higher target. He considers whether a higher target could be maintained in a stable way as it comes with more variations in the returns to capital, less credibility regarding the price stability component of the dual mandate, and less restraint on government spending.

John Cochrane, who is also a Hoover Institution senior fellow, suggests that the central bank and the government should not target a price inflation rate but the price level instead. The resulting stability would give confidence to firms, investors, and government bond buyers. For Cochrane, the most important thing is maintaining stable expectations so that inflation is one less thing for people to worry about as they make their economic decisions.

Brigitte Granville, professor at Queen Mary University of London and the author of Remembering Inflation, thinks that 5 percent is a better target. She cites empirical research that shows no effect on real economic growth when price inflation is in the 5 percent range. She does caution that stability is key, however. Her reasoning for a 5 percent target doesn’t make sense and is contradictory: “[Falling to a 2 percent target] would mean further compression of real household incomes,” but she also says “a recovery in real average wages, alongside higher-than-2% inflation, would provide a much-needed boost to productivity, as it would motivate workers . . . and create incentives for more labor-substituting investment.” Your guess is as good as mine.

Finally, Kenneth Rogoff, professor at Harvard University and former chief economist of the International Monetary Fund, says that a higher target should be adopted due to nominal wage rigidities and the zero lower bound for nominal interest rates. More inflation means that employers can more easily pay workers less in real terms without having to decrease nominal wages. Also, a higher long-term price inflation rate would give the central bank more room to cut interest rates in a crisis.

Rogoff says that the ability to impose negative interest rates would allow central banks to continue to target 2 percent. He gives some radical ideas on how to do that, like “phasing out large-denomination currency notes” and “relaxing the one-to-one exchange rate between the digital- and paper-currency dollar.” (!)

What Would Mises Say?

See the rest here

Be seeing you