The Inflation Debate That’s Muting the Fed’s Response

MONETARY policy makers at the Federal Reserve have long been classified as “hawks” or “doves.” The distinction is appealing in its simplicity. Hawks care deeply about inflation, while doves are willing to risk inflation to reduce unemployment.
Unfortunately, this division is no longer useful. Monetary policy makers are all hawks now. Even those who most emphasize the Fed’s role in fighting unemployment oppose policies that would raise inflation noticeably above the Fed’s implicit target of about 2 percent.
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Source: http://www.nytimes.com/2011/02/27/business/27view.html?_r=1

This is a must read for economic students !!!!!!!!!!!!!!!!!!!!!!!!!!!

5 thoughts on “The Inflation Debate That’s Muting the Fed’s Response

  1. yay I read the article ages ago. pretty good one🙂 Paul Krugman also has a lot of interesting entries relating to the inflation. I would highly recommend you guys have a look on them.

    Given the current US economy, Id be in favour of fiscal policy,and would think Obama should have stronger stimulus packages to the economy(kind of disappointed at Obama’s policies). However, there are quite few of controversial ideas about government expenditures’ multiplier effect on the economy. The following might help you guys have a general view. (http://krugman.blogs.nytimes.com/2009/01/27/a-dark-age-of-macroeconomics-wonkish/ )

    I personally agree with Paul🙂

    • Money policy will work well if the central bank manages to build up its credibility to people ( Australian is a good example, the RBA sets up the targeted inflation around 2.5 to 3% ) It would be a fundamental step for VN central bank should do.

      • @ Hi Kelly. Thanks for ur responses as well as the very interesting link on Krugman blog. Regarding the second comment, I definitely agree with you that building credibility should be conducted by the central bank, not only in Vietnam but also in all countries, as soon as possible because the nature of “credibility” is to reduce uncertainty, thus lower vulnerability.

        Thanks to Kelly comments, I have some very interesting ideas to discuss with you guys about the monetary policy in Vietnam. Hope you find some points interesting. In terms of credibility of the central bank, there are two things should be taken into account carefully:

        1. First, how to create credibility? Put in another way, what objectives of monetary policy should be targeted – exchange rate or inflation or interest rate or monetary aggregate….? I am afraid that one-size-fit-all policy experienced from other countries won’t probably work because of differences between the economies.

        2. Another thing has questioned me so far is that there is a fact that most developed countries have adopted the “targeted inflation” policy- Australia also belongs to this side of the game with other developed and stable countries, so is it suitable to adopt such a monetary policy strategy for the case of developing countries, especially Vietnam? How much growth we need to sacrifice to achieve such a targeted inflation? Is it acceptable for Vietnam – a country demands growth to catch up developed countries?

        Therefore, it is really important to identify:

        “What is the optimal monetary policy for Vietnam between targeted inflation, targeted exchange rate, targeted monetary aggregate or interest rate rule?”

        Wow, a great, great, and absolutely great question recommended to study further in the case of Vietnam. I’d love to read papers accounting for this question research or a piece of its. Any contribution to shed light this issue is valuable in the literature of the Vietnam economy. Later when I have more time, I will definitely deal with that one.

        Once more, thank you very much for your interesting comments, Kelly.

  2. I have to say that seeking a solution for VN does not simply count on monetary policies, and it could be a long discussions.If you guys are interested in how Japan, and Singapore achieved their success, some books I highly recommend you guys to read to understand more the issues) (https://kinhteking.wordpress.com/2011/10/23/sach-kinh-t%E1%BA%BF/#comments. 3 main sectors would let me spend bunch of money in government budget- health, education(my interest area) and technology.

    Regarding Vietnam, I think it depends on what stages we are on. Id think that maintaining economic growth and building up macroeconomic stability should be our main goal at the moment. By doing that, we not only create credibility to our people but also foreign investors.However, targeted inflation is only obtained as long as the central bank is independent.

    I know that VN government is trying to curb the inflation. Well, Im just thinking that high inflation sometimes is not a bad sign but a good kick for the economy, it depends on what causes of inflation are. Given the fact that we are receiving a lot of inflow investment from other countries, high inflation will be inevitable. Hope we do not overact with inflation to trade off with economic growth. Since I am wary that if growth stops in one day, a lot of serious issue could arise as a consequence.

    • No one can deny that the monetary policy is the most effective one to deal with the issues of the economy in the short-term. It is also acknowledged widely in Vietnam that “maintaining economic growth and building up macroeconomic stability” should be main goals, but the policy instruments have yet specified in detail so the policy is possibly discretionary, thus creating uncertainties for the economy and then lowering the effectiveness of the policy. I think that “Choosing a suitable rule and informing that rule to public seem the best strategy at the moment”. For the ‘suitable’ word, I mean the optimal policy (particularly monetary policy) which minimizes the loss function.

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