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.

Another highly informative piece of Ben Bernanke

Yesterday the “Chef” of the Fed, Ben Bernanke, published another highly informative piece about the state of money flow, liquidity, fear of inflation and general insights how he handled and is still handling the current economic crisis.  It will be interesting to see if Obama will try to use the Fed to pay for his HealthCare idea and other US government expenditures. Ben Bernanke is still resisting this push as he is also resiting the push of some Senators to audit the Fed.

The Congress, however, purposefully–and for good reason–excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, including open market and discount window operations. In doing so, the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy. Financial markets, in particular, likely would see a grant of review authority in these areas to the GAO as a serious weakening of monetary policy independence. Because GAO reviews may be initiated at the request of members of Congress, reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability. We will continue to work with the Congress to provide the information it needs to oversee our activities effectively, yet in a way that does not compromise monetary policy independence.

From my point of view, Ben Bernanke is a very fine man doing a very fine job.


he told the Senate Banking Committee. “The American consumer is not going to be the source of a global boom by any means.”