Lorenzo´s Socratic dialogue on NGDP Targeting
Lorenzo from Oz suggested the following "Socratic dialogue "on NGDP targeting in a comment to my previous post - I think it is so good it need to be repeated: Q: What has caused more damage; entrenched inflation (the 1970s) or massive deflation (1929-32)? A: Deflation. But that is not what we face. Q: What has caused more damage; entrenched inflation (the 1970s) or unexpected disinflation during a leveraging crunch (2008-?). A: But inflation is evil. Q: Why is inflation bad? A: Because it distorts private decisions. Q: Does it do that making basic parameters for judgement unreliable? A: Yes. Q: So it is about creating a clear and reliable framing for private decisions? A: Yes. Q: So, a central bank should provide a reliable framework for private decisions? A: Yes. Q: So it is about framing expectations in a credible way? A: Yes. Q: So, what is more important to people, expectations about income or expectations about prices? A: [Some obfustication] Q: So, should not a central bank seek to credibly generate expectations about income? A. [Some more obfustication] Q: In a highly leveraged age with many wages set by contracts operating across time and a range of “sticky” prices, which is more important to people, expectations about money income or “real” income? A. [Even more obfustication] Q: So, would not a clear target about aggregate income (aka NGDP aka Py) create a framework to anchor expectations in what people actually care about? A: [Meltdown] PS off to Vilnius, Lithuania today - nice city and nice people. I am among other things having a presentation about 1931 vs 2011 - and more important about whether 2012 will bring the same horrors as 1932 (My answer is - I fear so, but it is not too late to avoid).