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November 27, 2008


Luis Enrique

Does inflation targeting entail the same sort of welfare costs as a recession? If inflation targeting was abandoned, what would happen? A short run increase in employment followed by some sort of nasty correction? I'm not exactly sure what the consequences would be, but inflation targeting, painful consequences and all, can potentially be justified as a sort of long-run welfare optimising, least-bad approach to economic policy.

Whereas a recession (arguably) isn't like that - it's more like an avoidable miserable episode that we ought to do something about because we can - with output below potential, you can use inflationary policy levers etc.

So perhaps the answer to your question is that despite the (temporary) loss of jobs and misery raising interest rates entails, the alternatives to inflation targeting are worse, whereas with recessions the situation is reversed - the alternatives to the (temporary) loss of jobs and misery are all better. In policy terms, it makes sense to 'care' more about things you can do something about.

And in moral terms too; alleviating a recession seems to be a pretty straightforward 'good' act, but I don't see that allowing inflation to spiral is 'good' in the same sense, even if it does mean avoiding the pain of interest rate hikes. Isn't there an obvious moral difference between pain suffered to prevent greater pain in the future, and pain suffered to no good end?


"Or are there non-moral reasons to care so much about recession?"

Getting re-elected.

chris strange

I suspect that point 2, fear of unemployment, has a lot to do with it. Not unemployment in general but unemployment for Members of Parliament specifically since it is harder for a government to win a general election soon after a recession.

Nick Rowe

Nope. You are muddling two questions:

1. Should we try to keep inflation at some fixed target?

2. If so, what should that target be?

Question (1) is where you argue about whether keeping inflation at some fixed target reduces or increases fluctuations in unemployment.

Question (2) is where you argue shoe-leather costs etc. vs risks of going into a deflationary spiral (and no, Bernanke was not saying it was simple to escape from and nothing to worry about).

Your basic mistake is in asking "should he pick up the football and run with it?", rather than asking "is rugger a better game than soccer?". Expected inflation, not just actual inflation, matters for unemployment. The rules of the game determine expectations and therefore matter. Think rule-, not act-utilitarian.


As for stopping deflation by printing money people keep forgetting something. You need to spread it around as well, merely printing the stuff isn't enough. This is not merely a trite issue as fights about distribution really can stop effective action.

Mike Sproul

You assume that there is a trade-off between inflation and unemployment, but often there is not. Sargent's "The Ends of Four Big Inflations" shows that the European hyperinflations of the 1920's were ended without increasing unemployment. They ended inflation, not by restricting money growth, but by restoring adequate backing to the money that they did issue.
The best way to avoid recession is to issue more money. The best way to avoid inflation is to assure that the new money is adequately backed. Those two things are not mutually exclusive.

Lost Leader

"The 25,000 jobs that’ll be lost when Woolies closes represents just half of one average week of job losses between 1997 and 2005. No-one in government gave a damn about those losses. So why get so panicky when the rate of job destruction increases slightly?"

Because, unlike in the good times, it's going to be bloody tough for many of those 25,000 to get another job anytime soon.


Much of life, and good governance, lies in finding the right balance between opposing goals.

Think of it like speed limits on a road. Too much liquidity is dangerous, too little is needlessly limiting, medium is workable.


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Recession 2009 Victim

I think inflation is inevitable. How can you print countless billions of dollars and still have a strong dollar. The current rallies vs the european currencies is just temporary, all of these bailout will soon catch up with the US and the dollar will fall.


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