Ben Bernanke On Inflation Targeting In Japan

I know a fair number of extremely well-meaning left-of-center economists who, I believe, seriously misunderstand the monetary policy issues facing the country and seriously misunderstand the scope the Federal Reserve has to promote recovery. By contrast, Ben Bernanke understands these issues perfectly well. So the country should be in good shape. After all, he’s chairman of the Federal Reserve. But even though he understands, he just doesn’t seem to care.

Here’s a slice from “Japanese Monetary Policy: A Case of Self-Induced Paralysis” (PDF) in which he explains how adopting a specific inflation target in the 3-4 percent range could help promote recovery:

A problem with the current BOJ policy, however, is its vagueness. What precisely is meant by the phrase “until deflationary concerns subside”? Krugman (1999) and others have suggested that the BOJ quantify its objectives by announcing an inflation target, and further that it be a fairly high target. I agree that this approach would be helpful, in that it would give private decision-makers more information about the objectives of monetary policy. In particular, a target in the 3-4% range for inflation, to be maintained for a number of years, would confirm not only that the BOJ is intent on moving safely away from a deflationary regime, but also that it intends to make up some of the “price-level gap” created by eight years of zero or negative inflation.

Today, of course, the Federal Reserve has no inflation target. It does, however, have some inflation forecasts (PDF) which hold 2.5 percent out as an absolute ceiling. Vagueness plus hints that you’re targeting inflation of maybe 1.75 percent are, of course, not at all the same as explicitness in targeting inflation of three to four percent. I think it’s nice that Bernanke has started doing these press conferences, but what would be really nice would be if reporters started really querying him about this stuff.