A research paper from economists Michael Kiley and John Roberts at the Fed's Board of Governors will be presented Thursday at the Brookings Institution
- Suggests policymakers should allow prices to rise by around 3% annually during periods of high economic growth
- So the long-run average annual target of 2% is achieved after several years of lower inflation
- Keeping interest rates low while inflation spikes, presumably with output and wages also rising above potential, would "make up" for the accumulated effects of the long downturn in growth and inflation in the past decade
The research may well be important as a guide to how the Fed should react as inflation nears target.
But wait, there's more ... this on the same topic but via Financial Times and with a slightly different emphasis ...
- The two also estimate that episodes of rates at zero will last on average two and a half years
- Frequent episodes of ultra-low rates
- Part of the decline in the neutral rate of interest - the short-term rate consistent with price stability and economic output at its potential level
- This rate may have fallen for a number of reasons, including slower technological progress, an ageing population, and a shift in the demand for safe assets.
