Why stop at price level targeting?
In a recent post, Atlanta Fed President Raphael Bostic advocated a price level target:
I want to start my discussion in this post with two points I made in the previous two macroblog posts (here and here). First, I think a commitment to delivering a relatively predictable price-level path is a desirable feature of a well-constructed monetary framework. Price stability is in my view achieved if people can have confidence that the purchasing power of the dollars they hold today will fall within a certain range at any date in the future.
My second point was that, as a matter of fact, the Federal Open Market Committee (FOMC) delivered on this definition of price stability during the years 1995-2012. (The FOMC formally adopted its 2 percent long-run inflation target in 2012.)
On one level, I’m glad to see another Fed official advocate level targeting. But when I read his rationale for price level targeting, it actually better fits NGDP level targeting.
Notice that Bostic argues that the Fed did achieve something close to price level targeting during 1995-2012. What he doesn’t say is that monetary policy was clearly far too tight during 2008-12, and that growth in aggregate demand was much lower than desirable during this period. Indeed so much so that Ben Bernanke was calling for fiscal stimulus to help boost AD. Bernanke certainly did not believe that aggregate demand was adequate. So why not chose a monetary regime that would have delivered an appropriately expansionary policy during 2008-12?
One other point. Bernanke has called for a price level targeting regime that kicks in when the Fed hits the zero bound. If that had been in effect in 2008, then the price level would have been too low during 2008-12. This illustrates a very important point; it’s difficult to evaluate a policy alternative like price level targeting without knowing the specifics of where the Fed would set the trend line, if they did decide to adopt the policy. Whether the policy of 2008 was consistent with a 2% price level target depends entirely on where you set the baseline. Under Bernanke’s proposed regime, actual policy was too tight during 2008-12. In contrast, Bostic thought policy was just fine, as he set the trend line at a lower level than the actual price level in 2008.
HT: David Levey