September 02, 2003
Inflation Targeting

Alan Greenspan doesn't want his elbow jiggled by demands that he explain why this quarter's inflation rate is different from the previously-announced target, or why current monetary policy is setting interest rates at a level other than that given by a relatively-mechanistic Taylor rule. Steve Cecchetti, Brandeis professor and ex-New York Fed research chief, agrees with Greenspan's worries--but would like a medium-term announced inflation target anyway: Home US: ...There are two big pitfalls in the implementation of inflation targeting, both arising from formulaic implementation. One involves the technicalities of how interest rates are set. If you were to survey the academic literature that provides the conceptual underpinning for inflation targeting, you would find that most economists are discussing something called "inflation-forecast targeting". It is logical that policymakers should adjust interest rates in response to forecast deviations from the objective. That means having accurate forecasts as well as a quantitative estimate of the impact of interest rate changes on these forecasts. Getting these means building and using sophisticated models of a country's economy. This is an challenging task even for the smartest model-builders in the world. The Fed does an adequate job but employs hundreds of highly trained economists to...

Posted by DeLong at 08:42 PM

February 13, 2003
Hal Varian Sees Inflation in Our Future

Hal Varian (whom I rarely see on the Berkeley campus, even though his office is only one building over) offers his prescriptions for what should be done in the short run, the medium run, and the long run as far as U.S. fiscal policy is concerned. Most interesting, however, is his forecast that feckless politicians combined with the structural features of American politics are likely to push us toward much higher inflation--once the president has obtained "a pliable Federal Reserve Board" which "can probably be arranged." Deficits and Political Pain: ...let me offer my own prescriptions for the short, medium and long term. Though there is a good chance that the economy will be significantly stronger this year, it wouldn't hurt to have some modest short-run fiscal stimulus. Consumers have kept on spending; the real budget shortfall is coming from business spending and state government cutbacks. A sensible stimulus package would involve a temporary investment subsidy, like accelerated depreciation or even an old-fashioned investment tax credit, along with direct grants to the states. State tax increases and budget cuts could well exert a significant fiscal drag on the economy in the next year, so some attempt to moderate their impact...

Posted by DeLong at 11:02 AM

February 11, 2003
What Alan Greenspan Will Say This Week

The G-7 Group predicts: Greenspan will do a two-step... He will say that he opposes the double taxation of dividends on principle, and that ending such policy represents good long-term tax policy. But he will also concede that eliminating dividends does little to stimulate the economy in the near term and does so at the risk of high deficits. This is what he told moderates behind closed doors and he will not be able to go soft on this point. He will likely warn against a return to long-term budget deficits while stressing the need to curb spending. Greenspan will try to avoid endorsing one party's stimulus package over the other's. But anyone paying attention will understand that he believes the Democrats? smaller package aimed at 2003-04 is better for the economy....

Posted by DeLong at 03:10 PM