Menzie Chinn Explains it All for You: Demand Inflation Now!

Whether it’s Market Monetarist NGDP targeting (a.k.a. Damn The Inflation Rate; We Need Growth!) or Menzie’s recommendation of Conditional Inflation Targeting with a notably higher target, everything tells us that somewhat higher inflation is the current path to greater and more widespread long-term prosperity.

Raising the expected inflation rate will lower real interest rates and spur investment and consumption. It will also make it difficult for the de facto dollar peggers, such as China, to sustain their policies. The resulting real depreciation of the dollar would stimulate production of U.S. exports and domestic goods that compete with imports, boosting American production. The United States would get faster growth, an accelerated process of deleveraging, a quicker recovery, and a firmer foundation upon which to address long-term fiscal problems.


Like the market monetarist approach, Chinn’s proposal is basically for an automatic stabilizer based on unemployment levels, that anchors expectations (emphasis mine, both above and below):

a policy that would keep the Fed funds rate near zero and supplemented with other quantitative measures as long as unemployment remained above 7 percent or inflation stayed below 3 percent. Making the unemployment target explicit would also serve to constrain inflationary expectations: As the unemployment rate fell, the inflation target would fall with it.

As I said a while back:

Automatic stabilizers are the key to effective 1) policy and 2) expectation-setting. Because 1) They happen, and 2) People know they’re gonna happen. Could be fiscal or monetary, largely a question of where you inject the money.

In other words:
Full disclosure: as a wealth-holder/creditor, the policy proposed here is directly contrary to my own short-term best interests. I would much prefer to see a crash in financial asset prices resulting from deleveraging and slow-growth expectations, so I could buy those assets cheap with all the cash I’m sitting on. But for whatever crazy reasons, I’d rather that my (and your) children and grandchildren spend their lives in a thriving and widely prosperous country.
Cross-posted at Asymptosis.com