The other day I was seeking further comment on Andy Harless’ notion that it was a mistake for the Fed, having stabilized inflation at around 4 percent per year, to seek a further reduction down to 2 percent. This led to low nominal interest rates that have made it difficult (perhaps practically difficult or perhaps merely politically difficult or maybe both) for the Fed to respond to a contraction.
Interestingly, I know of only one country that stayed away from the ever lower inflation obsession of the major central banks. The Bank of Australia. Australia had about 4% inflation in their GDP deflator and 7.4% NGDP growth between 2000:2 and 2008:2. With a much higher inflation and NGDP trend rate going into the crisis, they we able to avoid the zero interest rate bound. And by the way, for those who think nominal shocks don’t explain real events like the recent recession, Australia was the only major developed economy to avoid a recession last year. Indeed they haven’t had one since 1991. They are called ‘the lucky country,” but I have argued that their culture lacks our puritanical obsession with inflation. Perhaps each member of our FOMC should drink a 6-pack of Fosters before their policy meetings.
World Bank, World Development Indicators – Google Public Data ExplorerEdit descriptionwww.google.comUnfortunately, the second rule of American politics (behind remember what team Curt Schilling plays for) is that you never suggest we imitate any foreign country in any way.