Ken Rogoff says Fed needs to set inflation target of 6pc to help ease crisis

Ken Rogoff says Fed needs to set inflation target of 6pc to help ease crisis
A leading US economist has called on the Federal Reserve to target an inflation rate of 5pc to 6pc over the next two years to erode the debt burden and slow the pace of job losses.

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 6:04AM GMT 20 Feb 2009

Professor Kenneth Rogoff, former chief economist of the International Monetary Fund, said the threat of debt deflation called for revolutionary measures as an insurance policy.

"Excess inflation right now would help ameliorate the problem. For that reason, it would be far better to have 5pc to 6pc inflation for a couple of years than to have 2pc to 3pc deflation," he told the Central Banking Journal. The Fed has shifted tentatively to an inflation target, but one anchored nearer "stability".

A number of economists have begun to make similar calls for a radical shift to deliberate monetary debasement, although few have gone as far as suggesting 6pc.

Such proposals cause a furious political reaction because they amount to a forced shift in wealth from savers to debtors.

Prof Rogoff – one of the few economists who recognised the gravity of this crisis early on – admits that his policy is fraught with danger because it could lead to an overshoot down the road, "ending up with 200pc inflation". But there may be no choice at a time when the financial system is "melting down". The Bank of Japan failed to act fast enough in the 1990s because it was "paralysed by fear" that aggressive monetary stimulus would get out of hand.

Prof Rogoff said big fiscal packages have a role to play in backing up a zero interest rate policy and ensuring that consumption does not collapse as house prices plummet, but the key is "determined monetary policy".

There are no good options at this late stage after years of errors. Standard monetary relationships have broken down. "Policy is in effect flying blind," he said.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4701569/Ken-Rogoff-says-Fed-needs-to-set-inflation-target-of-6pc-to-help-ease-crisis.html