Saturday, September 22, 2007

Kohn on Inflation Targeting (9/21/07)

Don Kohn gave a speech in Frankfurt yesterday at the German Bundesbank's 50th Anniversary conference on the "Success and Failure of Monetary Policy since the 1950s." The speech focuses on inflation targeting and asset price bubbles.

First, inflation targeting. The debate about whether the Fed should have an explicit inflation target reignited when Ben Bernanke became Chairman. Chairman Bernanke has been a strong supporter of inflation targeting. Vice-Chairman Kohn has been opposed to the idea. So it's interesting that in this speech Kohn seems to be warming up to the idea:

In many countries, ... price stability [is] pursued through the formal apparatus of an inflation target.... [T]he spread of such regimes has coincided with sustained low global inflation. In addition, no adopter of an inflation target has subsequently abandoned it....

Evidence has accumulated to suggest that stock prices, interest rates, and measures of inflation expectations seem to vary less in economies in which the central bank has an explicit long-run goal for inflation....

A formal inflation target represents a national embrace of a goal.... An important effect of such public acceptance of price stability is that it erodes the standing of those who would direct central bank action toward other ends. [I wonder who he's talking about.]
In the midst of this inflation-targeting lovefest, he interjects this caveat:
Before anyone jumps to the conclusion that Frankfurt is a stop on my road to Damascus, let this Saul state that for me the case remains open.
Wow... I'm almost giddy at what a great piece of Fedspeak that is. Doesn't it sound like he's at best noncommittal?

Note that he doesn't say "...let me state that the case remains open," instead he says, "let this Saul state..." Saul, or course, was the zealous persecuter of the early Christians in Jerusalem, who, while walking on the road to Damascus, was struck by lightning and received a revelation from God, thereafter becoming one of early Christianity's most fervent missionaries (St. Paul).

Now I may well be reading between lines that aren't there, but Don Kohn's speeches are usually very tightly written; he frequently says things obliquely, but he almost never says things unintentionally.

It sounds to me like Kohn is going do a Nixon-in-China on inflation targeting.

We'll tackle Kohn's thinking on asset bubbles in a subsequent post...


knzn said...

Is there any constituency for unit labor cost targeting? I've argued on several recent posts (and some last year) on my blog, one of which was picked up by Mark Thoma, that labor cost targeting would be better, because it would take away the difficulty about responding to supply shocks, such as the import price shock that the US will very likely experience over the next few years.

Marc Shivers said...

knzn: I've not heard anyone at the Fed talk explicitly about ULC targeting, certainly no one on the FOMC. They usually won't even say the phrase, instead using the more ambiguous "resource utilization."

I can't imagine ULC ever becoming an explicit policy goal. The political headwinds against that way of framing the issue are, I think, insurmountable. Can you imagine how the UAW or Barney Frank would respond to even the suggestion? It would immediately be reframed as some kind of class warfare issue to score political points.

knzn said...

Yes, it does seem to be immediately reframed as a class warfare issue by most of the commenters on the blogs. The great irony is that ULC targeting would probably benefit the working class more than anyone else.

knzn said... seems to me one could put a positive spin on ULC targeting by saying that the purpose is to guarantee that compensation rises with productivity. Compared to what has actually happened over the past 15-20 years, that should sound like a good deal for labor. The Fed, of course, can't do anything about real compensation, but they could at least ensure that nominal compensation rises with productivity.