Sunday, 12 June 2016

What’s best: 0% inflation or 2% inflation?

Narayana Kocherlakota, a professor of economics at the University of Rochester and he served as president of the Federal Reserve Bank of Minneapolis from 2009 through 2015.

In this Bloomberg article he argues for 2% inflation because 2% has always been the target, and we should stick to it so as to provide PREDICTABILITY for everyone: investors, savers and so on. However, that predictability point doesn’t tell us what the FUNDAMENTAL arguments for 2% are (as opposed to 0%, minus 3% or any other figure).

One fundamental argument for a small positive rate stems from the “wages are sticky downwards” point. That is, it’s desirable for wages in different professions to change relative to each other in line with supply and demand. But it’s difficult and sometimes impossible to actually cut wages in some sectors, else you get strikes. Ergo to some extent RELATIVE wage changes have to come about raising the wage in some sectors, rather than by cutting them in others.

Also inflation is a tax on people and firms with piles of cash and no idea what to do with it. Taxes have to be collected, and that tax on hoarders isn't a bad tax.

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