Together, they make the arguments for Credit Where It’s Due far better than I managed. The arguments being: don’t worry about inflation right now, and a nominal growth target is superior.
First Hat Tip to Luis commenting here, for the link to this blogpost: “Target the Cause not the Symptom“. It is worth reading twice to understand how growth targets prevent central banks responding in the wrong way to a supply shock of some kind. Very very clever, full of graphs.
The second Hat Tip goes to my friend John who sent me a private paper from a training body, with a piece by Van Hosington about Deflation and Inflation. I have often observed how a credit crunch damages supply capacity – a point made by Charles Bean for example. In this publicly available newsletter, Van H makes the point much better than me:
Inflation will not commence until the Aggregate Demand (AD) Curve shifts outward sufficiently to reach the part of the Aggregate Supply (AS) curve that is upward sloping. The AS curve is perfectly elastic or horizontal when substantial excess capacity exists. Excess capacity causes firms to cut staff, wages and other costs. Since wage and benefit costs comprise about 70% of the cost of production, the AS curve will shift outward, meaning that prices will be lower at every level of AD. Therefore, multiple outward shifts in the Aggregate Demand curve will be required before the economy encounters an upward sloping Aggregate Supply Curve thus creating higher price levels. In our opinion such a process will take well over a decade.
This may be optimistic. My view is that the SRAS can be so elastic if firms have access to capital to expand and so choose the lower-price higher Q route. That is what I was calling for. … he has made my case stronger, I think
