Paul Krugman makes the case for a higher inflation target
But what really stands out, if you assume that discretionary fiscal policy won’t be there when you need it, is that this makes the case for a higher inflation target. Olivier Blanchard, at the IMF, made just that case a year ago(pdf). If we’d come into this crisis with 4 or 5 percent inflation, not 2, there would have been more scope for conventional monetary policy to act before hitting the zero lower bound.
Paul Krugman makes the case for a higher inflation target. This sounds a lot like the argument I have been making for a while, and it should. Paul and I largely agree on how the economy works.
We disagree on whether government spending can be targeted in effective fine grained ways, but that’s the point. Disagreement over the effectiveness of market versus public allocation of resources should not alter your view on the relationship between monetary policy and recessions.