OK, I get it that NK macroeconomists like to think about r*, the ST interest rate (~ the same thing as one of Central Bank policy instruments) that is consistent with full employment at the target rate of inflation. AND I’ll accept the premise that IF Central Banks had no other policy instrument available to use when shocks requi…
OK, I get it that NK macroeconomists like to think about r*, the ST interest rate (~ the same thing as one of Central Bank policy instruments) that is consistent with full employment at the target rate of inflation. AND I’ll accept the premise that IF Central Banks had no other policy instrument available to use when shocks required temporarily higher inflation to maintain full employment and r* near zero would be a problem.
But …
a) With structural fiscal deficits across developed countries having risen, reducing savings and private investment, I see less reason to expect r* to remain near zero than before the Pandemic.
b) Some (even if they are less gung ho than Noah Smith) hold out hope that the development of mRNA vaccines and LLMs may signal in end to a period of low technological change which would increase demand for private investment, also pushing up r*.
c) Changes in ST interest rates are not the only policy instrument that central banks have for temporarily increasing inflation above target. IOR and QE have already been used and I have confidence that central banks coud invent others. It would be a bold secular stagnation hawk who would be willing to bet against a central bank that announced that it would do “whatever it takes” to raise inflation to above target.
We don’t need r.* One does not need a view on r* to think the Fed should have reduced the EFFR in December and should do so in January rather than waiting until March.
Arrrrr*!
OK, I get it that NK macroeconomists like to think about r*, the ST interest rate (~ the same thing as one of Central Bank policy instruments) that is consistent with full employment at the target rate of inflation. AND I’ll accept the premise that IF Central Banks had no other policy instrument available to use when shocks required temporarily higher inflation to maintain full employment and r* near zero would be a problem.
But …
a) With structural fiscal deficits across developed countries having risen, reducing savings and private investment, I see less reason to expect r* to remain near zero than before the Pandemic.
b) Some (even if they are less gung ho than Noah Smith) hold out hope that the development of mRNA vaccines and LLMs may signal in end to a period of low technological change which would increase demand for private investment, also pushing up r*.
c) Changes in ST interest rates are not the only policy instrument that central banks have for temporarily increasing inflation above target. IOR and QE have already been used and I have confidence that central banks coud invent others. It would be a bold secular stagnation hawk who would be willing to bet against a central bank that announced that it would do “whatever it takes” to raise inflation to above target.
We don’t need r.* One does not need a view on r* to think the Fed should have reduced the EFFR in December and should do so in January rather than waiting until March.