Bernanke says the Fed should consider price-level targeting or a 'make up' approach to inflation
Let's say a central bank has a 2% annual inflation target.
In one year, that means a basket of goods costing $100 should rise to $102. But if inflation is at 0%, then it stays at $100 and the central bank has missed its target.
Now let's say it misses its target 10 years in a row. If the target had been met, the $100 basket would cost $121.90 (with compounding). But if the target was missed every year, it would still be at $100. So there's at 21.9% shortfall.
What if instead of targeting 2% the next year, the target is a level in the index.
So the central bank could say it's going to keep rates low until that level is achieved.
Today Ben Bernanke is out with an article today saying that's what the Fed should consider. It would mean central banks commits to compensating for "missing" monetary ease after the economy leaves the zero lower bound.
I think it's a powerful idea because it adds some certainty coming out of a period of low inflation. As an investor (or lender), it tells you to be aggressive rather than seeking 3% yielding assets.
Could it be done credibly? That's a challenge.
But I think (and so does Ben Bernanke) that we're doomed for a generation of no or negative inflation and that the Fed is fighting a losing battle by trying to play by the Old Normal rules.
Anyone else miss Bernanke?
