Should-Read: Christopher Jeffery: Fed’s [John] Williams floats co-ordinated shift from 2% targets

September 28, 2017

Should-Read: Christopher Jeffery: Fed’s [John] Williams floats co-ordinated shift from 2% targets: “Williams… believes 2% inflation targets adopted by most of the developed world’s central banks will prove to be suboptimal over the next 10 years…

…Real productivity and the associated natural rate of interest (used in the Taylor rule, for example) are both in decline – and there is no reason to believe this will change in the next decade or so. “There could be a mutual benefit for countries to change their price-stability policies together,” says Williams in the in-depth interview, to be published tomorrow…. “QE is viewed – fairly or unfairly (I would say unfairly) – as a ‘beggar-thy-neighbour’ policy,” he says. “Research has indicated that if several countries are at the lower bound, while these policies primarily work by boosting demand, they also result in shifting demand from one country to another. So maybe co-operation and co-ordination should be happening in the discussion about frameworks.”… If all central banks stick with “current low inflation targets”, when one country has to stimulate the economy via QE, “a lot of the effect will happen through demand shifting, or beggaring thy neighbour”: “The scary scenario is a repeat of what we’ve seen, where everybody’s at the lower bound – not because of a crisis, but due to the reasons recessions happen – and we’re all stuck with uncomfortable choices.”…

“If you want to see my gloomy view of the future, just open up your computer and look at the last five years,” he says. “I’m not saying that we’re going to have another financial crisis, it’s just that the challenges of using interest rates to keep the economy on track and inflation stable are going to be very difficult.” Instead of people calling for central banks to co-ordinate regular policy actions – which Williams says is “almost impossible, tactically, in most circumstances” – they should engage in a “true policy strategy debate”.

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