Does Slack affect inflation?


This is an interesting piece in WSJ that poses the question: Does slack affect inflation?

Economists, Mr. Bullard notes, have badly misread the degree and importance of slack in the economy in the past. In the 1970s, the Fed bet that high unemployment meant inflation would fall. Instead, it rose: The productivity of the nation’s work force was slowing, resulting in a need for more workers that created unexpected inflationary pressure.

also see his paper on inflation:

The main conclusion of this paper is that independent central banks will set low positive inflation targets in economies that possess highly developed financial markets. This finding seems to be broadly consistent with the comfort zones articulated by some of the world’s leading central bankers. Less fortunate societies with relatively undeveloped asset markets will choose higher inflation targets to improve credit market performance. Slower growth tends to raise inflation targets, and the highest targets should be expected from stagnating economies with poorly developed financial institutions.

This is also an nice paper by Bullard from 1999, with a nice inflation graph. And

In suggesting a numerical target near 2 percent, Bernanke emphasized that very low levels of inflation
are generally preferred, but not so low that the FOMC would face an unacceptably high risk of encountering the zero lower bound on nominal interest rates, as has occurred in Japan over the past decade.

from here in 2005.

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s