I’ve recently seen a few tweets that look at the pros and cons of inflation. This is it Phillips seems to have taken the curve as a way to formulate the problem:
This is it Opposes high inflation:
I’m not a fan of any tweets.
It is true that using monetary policy to push inflation up or down suddenly can create a negative short-term relationship between inflation and unemployment. But we learned in the 1970s that the Phillips curve was not an effective way to think about inflation for all sorts of reasons. Rather contact on the issue of inflation This Basically, we need to think about a The best monetary policy regime. Should be analyzed Time is consistent.
For example, suppose you adopt a more expansive monetary policy to avoid rising unemployment and this leads to higher inflation. That sounds like a pretty clear example of a policy off trade, doesn’t it? In fact, this trade-off is largely illusory, as it ignores the long-term effects. If further expansionary monetary policy reduces unemployment, you have two options, to keep the rate of inflation high forever, or to reduce it to a later date.
With persistently high inflation rates, you’re buying a few years of low unemployment in contrast to an infinite number of years of high inflation, not at all what the readers of the tweet poll predicted. If inflation is reduced after only a few years of maintaining highs, then you are simply postponing high unemployment for a few more years. Again, that’s not what the poll question seems to mean.
The second tweet is also misleading. If the Fed raises the target inflation rate from 2% to 3%, the public will hardly notice. Because the Fed achieves its goals by influencing Overall demand. Since AD affects both wages and prices, moderate demand-side inflation is not so unpopular. The current inflation is unpopular because the push of supply is reducing the quality of life (especially food and energy). But using monetary policy to change the inflation target from 2% to 3% will have no effect on the unpopular supply-side inflation.
To be clear, I do not support raising the inflation target from 2% to 3%, which I see as a slight negative. But the current unpopularity of inflation has little effect on the merits of that proposal. Inflation was around 4% in 1982-90, and it was not a big problem. If inflation had been 3% between 1982-90, it would have been a much smaller problem.
A good reason to keep inflation at 2% is that monetary policy is more effective when it has credibility. A credible monetary policy is better to prevent business cycles. A sudden shift to 3% inflation would reduce the credibility of the Fed (which is already in shaky ground). So this is a bad idea.