speeches · October 9, 2008

Regional President Speech

James Bullard · President

INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS THE OPTIMAL INFLATION TARGET IN AN ECONOMY WITH LIMITED ENFORCEMENT GaetanoAntinolfi WashingtonUniversity CostasAzariadis WashingtonUniversityandFRB-St. Louis JamesBullard* FederalReserveBankofSt. Louis NewPerspectivesonMonetaryPolicyDesign Barcelona,Spain 10October2008 ViewsexpressedarethoseoftheauthoranddonotnecessarilyreflectofficialpositionsoftheFOMCortheFederalReserveSystem. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS COMFORT ZONES TypicalFOMCmemberstatements: 1to2percentinflation wouldbeideal. “Smallpositiveinflationisthebestinflationtarget.” Associatedwithshort-termnominalinterestratesnear5percent. Economictheory: nominalinterestratesshouldbezero. Whythedifference? INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS THEORY AND REALITY: WHY THE DIFFERENCE? Japan. Summers(1991): Zeroboundonnominalinterestratesinterferes withstabilizationpolicy. AdamandBilli(2006). Smith(2002). Deflationcausesdisintermediation,harmingthe operationofcreditmarkets. Westudyaversionofthelatter: Asmallamountofinflation“deepensfinancialmarkets”inaway wemakeprecise. Acontinuumofinfinitely-livedhouseholds. Endowmentsfluctuate. Twoassets: currencyandconsumptionloans. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS WHAT WE DO Endowmenteconomywithconstantaggregateincome. Endowmentsfluctuate. Twoassets: currencyandconsumptionloans. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS WHAT WE DO Endowmenteconomywithconstantaggregateincome. Acontinuumofinfinitely-livedhouseholds. Twoassets: currencyandconsumptionloans. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS WHAT WE DO Endowmenteconomywithconstantaggregateincome. Acontinuumofinfinitely-livedhouseholds. Endowmentsfluctuate. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS WHAT WE DO Endowmenteconomywithconstantaggregateincome. Acontinuumofinfinitely-livedhouseholds. Endowmentsfluctuate. Twoassets: currencyandconsumptionloans. “Townsend-Bewley-type”orcashagentscanonlyusecurrencyin nonnegativeamountstosmoothconsumption. “Kehoe-Levine-type”orcreditagentscanparticipateineither assetmarketsubjecttoendogenousdebtconstraints. Defaultispunishedbyperpetualexclusionfromtheloanmarket butstillpermitsdefaultinghouseholdstoholdnonnegative currency. Inflationwillmakedefaultlessattractive,loosening participationconstraintsandstrengtheningthecreditmarket. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS AGENT TYPES Householdsaredividedintotwotypes. “Kehoe-Levine-type”orcreditagentscanparticipateineither assetmarketsubjecttoendogenousdebtconstraints. Defaultispunishedbyperpetualexclusionfromtheloanmarket butstillpermitsdefaultinghouseholdstoholdnonnegative currency. Inflationwillmakedefaultlessattractive,loosening participationconstraintsandstrengtheningthecreditmarket. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS AGENT TYPES Householdsaredividedintotwotypes. “Townsend-Bewley-type”orcashagentscanonlyusecurrencyin nonnegativeamountstosmoothconsumption. Defaultispunishedbyperpetualexclusionfromtheloanmarket butstillpermitsdefaultinghouseholdstoholdnonnegative currency. Inflationwillmakedefaultlessattractive,loosening participationconstraintsandstrengtheningthecreditmarket. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS AGENT TYPES Householdsaredividedintotwotypes. “Townsend-Bewley-type”orcashagentscanonlyusecurrencyin nonnegativeamountstosmoothconsumption. “Kehoe-Levine-type”orcreditagentscanparticipateineither assetmarketsubjecttoendogenousdebtconstraints. Inflationwillmakedefaultlessattractive,loosening participationconstraintsandstrengtheningthecreditmarket. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS AGENT TYPES Householdsaredividedintotwotypes. “Townsend-Bewley-type”orcashagentscanonlyusecurrencyin nonnegativeamountstosmoothconsumption. “Kehoe-Levine-type”orcreditagentscanparticipateineither assetmarketsubjecttoendogenousdebtconstraints. Defaultispunishedbyperpetualexclusionfromtheloanmarket butstillpermitsdefaultinghouseholdstoholdnonnegative currency. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS AGENT TYPES Householdsaredividedintotwotypes. “Townsend-Bewley-type”orcashagentscanonlyusecurrencyin nonnegativeamountstosmoothconsumption. “Kehoe-Levine-type”orcreditagentscanparticipateineither assetmarketsubjecttoendogenousdebtconstraints. Defaultispunishedbyperpetualexclusionfromtheloanmarket butstillpermitsdefaultinghouseholdstoholdnonnegative currency. Inflationwillmakedefaultlessattractive,loosening participationconstraintsandstrengtheningthecreditmarket. Deflationisinfeasibleiftheplannerassignspositiveweightto credithouseholds. Inflationhigherthanthelevelrequiredtoslackendebt constraintswillnotbechoseniftheplannerassignssufficient weighttocashhouseholds. Iftheplannerputsarelativeweightgreaterthanzerobutless thanthepopulationweightoncredithouseholds,theoptimum inflationrateispositive. Conclude: Independentcentralbankswillsetlowpositive inflationtargetsineconomiesthatpossesshighlydeveloped financialmarkets. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS PREVIEW OF MAIN FINDINGS Westudyaparticularsocialplanningproblem,madeprecise below. Inflationhigherthanthelevelrequiredtoslackendebt constraintswillnotbechoseniftheplannerassignssufficient weighttocashhouseholds. Iftheplannerputsarelativeweightgreaterthanzerobutless thanthepopulationweightoncredithouseholds,theoptimum inflationrateispositive. Conclude: Independentcentralbankswillsetlowpositive inflationtargetsineconomiesthatpossesshighlydeveloped financialmarkets. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS PREVIEW OF MAIN FINDINGS Westudyaparticularsocialplanningproblem,madeprecise below. Deflationisinfeasibleiftheplannerassignspositiveweightto credithouseholds. Iftheplannerputsarelativeweightgreaterthanzerobutless thanthepopulationweightoncredithouseholds,theoptimum inflationrateispositive. Conclude: Independentcentralbankswillsetlowpositive inflationtargetsineconomiesthatpossesshighlydeveloped financialmarkets. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS PREVIEW OF MAIN FINDINGS Westudyaparticularsocialplanningproblem,madeprecise below. Deflationisinfeasibleiftheplannerassignspositiveweightto credithouseholds. Inflationhigherthanthelevelrequiredtoslackendebt constraintswillnotbechoseniftheplannerassignssufficient weighttocashhouseholds. Conclude: Independentcentralbankswillsetlowpositive inflationtargetsineconomiesthatpossesshighlydeveloped financialmarkets. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS PREVIEW OF MAIN FINDINGS Westudyaparticularsocialplanningproblem,madeprecise below. Deflationisinfeasibleiftheplannerassignspositiveweightto credithouseholds. Inflationhigherthanthelevelrequiredtoslackendebt constraintswillnotbechoseniftheplannerassignssufficient weighttocashhouseholds. Iftheplannerputsarelativeweightgreaterthanzerobutless thanthepopulationweightoncredithouseholds,theoptimum inflationrateispositive. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS PREVIEW OF MAIN FINDINGS Westudyaparticularsocialplanningproblem,madeprecise below. Deflationisinfeasibleiftheplannerassignspositiveweightto credithouseholds. Inflationhigherthanthelevelrequiredtoslackendebt constraintswillnotbechoseniftheplannerassignssufficient weighttocashhouseholds. Iftheplannerputsarelativeweightgreaterthanzerobutless thanthepopulationweightoncredithouseholds,theoptimum inflationrateispositive. Conclude: Independentcentralbankswillsetlowpositive inflationtargetsineconomiesthatpossesshighlydeveloped financialmarkets. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS RECENT RELATED LITERATURE AiyagariandWilliamson(2000JET). Relatedenvironment,randomendowments,outsideoptionis Bewley,emphasisonfinancialintermediation,positiveinflation detersdefault,computational. Berentsen,CameraandWaller(2007JET). Relatedenvironment,Lagos-Wright,emphasisonfinancial intermediation,positiveinflationdetersdefault. Ragot(2007). OLGframework. Andolfatto(2007). Antinolfi,Azariadis,andBullard(2007). Moneyistheonlyasset,emphasisondynamicsandequilibrium selection. Sanchez,Williamson,andWright(2007). Blackboardversion. λ“Kehoe-Levine”orcredittypeagents. 1 λ“Townsend-Bewley”orcashtypeagents. (cid:0) Alltypeshaveidenticalpreferences ∞ ∑ βtu ci (1) t t=0 (cid:16) (cid:17) withdiscountfactor0< β <1,u(c)standard,andi=0,1,2,3. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS ENVIRONMENT Continuumofinfinitely-livedhouseholds. 1 λ“Townsend-Bewley”orcashtypeagents. (cid:0) Alltypeshaveidenticalpreferences ∞ ∑ βtu ci (1) t t=0 (cid:16) (cid:17) withdiscountfactor0< β <1,u(c)standard,andi=0,1,2,3. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS ENVIRONMENT Continuumofinfinitely-livedhouseholds. λ“Kehoe-Levine”orcredittypeagents. Alltypeshaveidenticalpreferences ∞ ∑ βtu ci (1) t t=0 (cid:16) (cid:17) withdiscountfactor0< β <1,u(c)standard,andi=0,1,2,3. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS ENVIRONMENT Continuumofinfinitely-livedhouseholds. λ“Kehoe-Levine”orcredittypeagents. 1 λ“Townsend-Bewley”orcashtypeagents. (cid:0) INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS ENVIRONMENT Continuumofinfinitely-livedhouseholds. λ“Kehoe-Levine”orcredittypeagents. 1 λ“Townsend-Bewley”orcashtypeagents. (cid:0) Alltypeshaveidenticalpreferences ∞ ∑ βtu ci (1) t t=0 (cid:16) (cid:17) withdiscountfactor0< β <1,u(c)standard,andi=0,1,2,3. Cashhouseholdsaredividedintotwosub-types,2and3,with mass1 λ/2each. (cid:0) Endowments,interpretedasincomeshares,areperiodic: (1+α,1 α) ift=0,2,... ω0,ω1 = ω2,ω3 = (cid:0) (2) t t t t (1 α,1+α) ift=1,3,... (cid:16) (cid:17) (cid:16) (cid:17) (cid:26) (cid:0) α (0,1)indexesthedegreeofincomevolatility. 2 Aggregateincomeisconstant. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS ENDOWMENTS Credithouseholdsaredividedintotwosub-types,0and1,with massλ/2each. Endowments,interpretedasincomeshares,areperiodic: (1+α,1 α) ift=0,2,... ω0,ω1 = ω2,ω3 = (cid:0) (2) t t t t (1 α,1+α) ift=1,3,... (cid:16) (cid:17) (cid:16) (cid:17) (cid:26) (cid:0) α (0,1)indexesthedegreeofincomevolatility. 2 Aggregateincomeisconstant. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS ENDOWMENTS Credithouseholdsaredividedintotwosub-types,0and1,with massλ/2each. Cashhouseholdsaredividedintotwosub-types,2and3,with mass1 λ/2each. (cid:0) α (0,1)indexesthedegreeofincomevolatility. 2 Aggregateincomeisconstant. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS ENDOWMENTS Credithouseholdsaredividedintotwosub-types,0and1,with massλ/2each. Cashhouseholdsaredividedintotwosub-types,2and3,with mass1 λ/2each. (cid:0) Endowments,interpretedasincomeshares,areperiodic: (1+α,1 α) ift=0,2,... ω0,ω1 = ω2,ω3 = (cid:0) (2) t t t t (1 α,1+α) ift=1,3,... (cid:16) (cid:17) (cid:16) (cid:17) (cid:26) (cid:0) Aggregateincomeisconstant. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS ENDOWMENTS Credithouseholdsaredividedintotwosub-types,0and1,with massλ/2each. Cashhouseholdsaredividedintotwosub-types,2and3,with mass1 λ/2each. (cid:0) Endowments,interpretedasincomeshares,areperiodic: (1+α,1 α) ift=0,2,... ω0,ω1 = ω2,ω3 = (cid:0) (2) t t t t (1 α,1+α) ift=1,3,... (cid:16) (cid:17) (cid:16) (cid:17) (cid:26) (cid:0) α (0,1)indexesthedegreeofincomevolatility. 2 INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS ENDOWMENTS Credithouseholdsaredividedintotwosub-types,0and1,with massλ/2each. Cashhouseholdsaredividedintotwosub-types,2and3,with mass1 λ/2each. (cid:0) Endowments,interpretedasincomeshares,areperiodic: (1+α,1 α) ift=0,2,... ω0,ω1 = ω2,ω3 = (cid:0) (2) t t t t (1 α,1+α) ift=1,3,... (cid:16) (cid:17) (cid:16) (cid:17) (cid:26) (cid:0) α (0,1)indexesthedegreeofincomevolatility. 2 Aggregateincomeisconstant. The“unbanked.” Noclaimscanbeenforcedonthemorbythem. Creditagentsmayenterintoloanarrangementstosmooth consumptionsubjecttoendogenousdebtlimits,asinKehoeand Levine(1993). Creditagentswhodefaultareforeverexcludedfromtheloan marketandmustinsteadusecurrency. Futureinflationrateswillimpactthepayofftodefault. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS NATURE OF THE ENVIRONMENT Cashagentsareanonymoushouseholdswhomayonlyuse currencytosmoothincomefluctuations,asinBewley(1980). The“unbanked.” Creditagentsmayenterintoloanarrangementstosmooth consumptionsubjecttoendogenousdebtlimits,asinKehoeand Levine(1993). Creditagentswhodefaultareforeverexcludedfromtheloan marketandmustinsteadusecurrency. Futureinflationrateswillimpactthepayofftodefault. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS NATURE OF THE ENVIRONMENT Cashagentsareanonymoushouseholdswhomayonlyuse currencytosmoothincomefluctuations,asinBewley(1980). Noclaimscanbeenforcedonthemorbythem. Creditagentsmayenterintoloanarrangementstosmooth consumptionsubjecttoendogenousdebtlimits,asinKehoeand Levine(1993). Creditagentswhodefaultareforeverexcludedfromtheloan marketandmustinsteadusecurrency. Futureinflationrateswillimpactthepayofftodefault. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS NATURE OF THE ENVIRONMENT Cashagentsareanonymoushouseholdswhomayonlyuse currencytosmoothincomefluctuations,asinBewley(1980). Noclaimscanbeenforcedonthemorbythem. The“unbanked.” Creditagentswhodefaultareforeverexcludedfromtheloan marketandmustinsteadusecurrency. Futureinflationrateswillimpactthepayofftodefault. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS NATURE OF THE ENVIRONMENT Cashagentsareanonymoushouseholdswhomayonlyuse currencytosmoothincomefluctuations,asinBewley(1980). Noclaimscanbeenforcedonthemorbythem. The“unbanked.” Creditagentsmayenterintoloanarrangementstosmooth consumptionsubjecttoendogenousdebtlimits,asinKehoeand Levine(1993). Futureinflationrateswillimpactthepayofftodefault. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS NATURE OF THE ENVIRONMENT Cashagentsareanonymoushouseholdswhomayonlyuse currencytosmoothincomefluctuations,asinBewley(1980). Noclaimscanbeenforcedonthemorbythem. The“unbanked.” Creditagentsmayenterintoloanarrangementstosmooth consumptionsubjecttoendogenousdebtlimits,asinKehoeand Levine(1993). Creditagentswhodefaultareforeverexcludedfromtheloan marketandmustinsteadusecurrency. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS NATURE OF THE ENVIRONMENT Cashagentsareanonymoushouseholdswhomayonlyuse currencytosmoothincomefluctuations,asinBewley(1980). Noclaimscanbeenforcedonthemorbythem. The“unbanked.” Creditagentsmayenterintoloanarrangementstosmooth consumptionsubjecttoendogenousdebtlimits,asinKehoeand Levine(1993). Creditagentswhodefaultareforeverexcludedfromtheloan marketandmustinsteadusecurrency. Futureinflationrateswillimpactthepayofftodefault. ... anddirectlyselectsconsumptionvectorsforcreditagentswho mayeitheraccepttheirallocationsorbehavelikecashagentsin perpetuity. Theinflationtargetinthiseconomyissimilartoanoptimaltax subjecttoanincentiveconstraintasunderstoodbyMirrlees (1971). INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS THE MONETARY AUTHORITY, BRIEF VERSION Benevolentsocialplannerchoosesaconstantinflationrateat whichcashagentscantrade... Theinflationtargetinthiseconomyissimilartoanoptimaltax subjecttoanincentiveconstraintasunderstoodbyMirrlees (1971). INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS THE MONETARY AUTHORITY, BRIEF VERSION Benevolentsocialplannerchoosesaconstantinflationrateat whichcashagentscantrade... ... anddirectlyselectsconsumptionvectorsforcreditagentswho mayeitheraccepttheirallocationsorbehavelikecashagentsin perpetuity. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS THE MONETARY AUTHORITY, BRIEF VERSION Benevolentsocialplannerchoosesaconstantinflationrateat whichcashagentscantrade... ... anddirectlyselectsconsumptionvectorsforcreditagentswho mayeitheraccepttheirallocationsorbehavelikecashagentsin perpetuity. Theinflationtargetinthiseconomyissimilartoanoptimaltax subjecttoanincentiveconstraintasunderstoodbyMirrlees (1971). atransferofresourcesfromthecashsector,and areductioninthedefaultpayoffwhichbringsabouthigherdebt limits. ... andconfertwobenefitsoncreditagents: INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS COSTS AND BENEFITS OF POSITIVE INFLATION Positiveratesofinflationimposeataxoncashagents... atransferofresourcesfromthecashsector,and areductioninthedefaultpayoffwhichbringsabouthigherdebt limits. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS COSTS AND BENEFITS OF POSITIVE INFLATION Positiveratesofinflationimposeataxoncashagents... ... andconfertwobenefitsoncreditagents: areductioninthedefaultpayoffwhichbringsabouthigherdebt limits. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS COSTS AND BENEFITS OF POSITIVE INFLATION Positiveratesofinflationimposeataxoncashagents... ... andconfertwobenefitsoncreditagents: atransferofresourcesfromthecashsector,and INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS COSTS AND BENEFITS OF POSITIVE INFLATION Positiveratesofinflationimposeataxoncashagents... ... andconfertwobenefitsoncreditagents: atransferofresourcesfromthecashsector,and areductioninthedefaultpayoffwhichbringsabouthigherdebt limits. Itwouldassign(c ,c )tohighincomeandlowincomecredit H L agents,andconsumption(x ,x )tothecorrespondingcash H L agents. Equivalenttolump-sumtaxesonsomeagentsandlump-sum subsidiestoothers. Becauseinflationisadistortionarytax,wedefineamodified planningproblem. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS INFLATION TARGETING AS A PLANNING PROBLEM Pureequal-treatmentplanningproblemwouldchooseaperiodic consumptionsequenceforeachagent. Equivalenttolump-sumtaxesonsomeagentsandlump-sum subsidiestoothers. Becauseinflationisadistortionarytax,wedefineamodified planningproblem. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS INFLATION TARGETING AS A PLANNING PROBLEM Pureequal-treatmentplanningproblemwouldchooseaperiodic consumptionsequenceforeachagent. Itwouldassign(c ,c )tohighincomeandlowincomecredit H L agents,andconsumption(x ,x )tothecorrespondingcash H L agents. Becauseinflationisadistortionarytax,wedefineamodified planningproblem. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS INFLATION TARGETING AS A PLANNING PROBLEM Pureequal-treatmentplanningproblemwouldchooseaperiodic consumptionsequenceforeachagent. Itwouldassign(c ,c )tohighincomeandlowincomecredit H L agents,andconsumption(x ,x )tothecorrespondingcash H L agents. Equivalenttolump-sumtaxesonsomeagentsandlump-sum subsidiestoothers. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS INFLATION TARGETING AS A PLANNING PROBLEM Pureequal-treatmentplanningproblemwouldchooseaperiodic consumptionsequenceforeachagent. Itwouldassign(c ,c )tohighincomeandlowincomecredit H L agents,andconsumption(x ,x )tothecorrespondingcash H L agents. Equivalenttolump-sumtaxesonsomeagentsandlump-sum subsidiestoothers. Becauseinflationisadistortionarytax,wedefineamodified planningproblem. Next,givenπ,highincomecashagentschooseaperiodic consumptionvector(x ,x ) 0tomaximizestationary H L (cid:21) discountedutility 1 [u(x )+βu(x )] (3) 1 β2 H L (cid:0) subjectto x 1+α, (4) H (cid:20) x +πx =1+α+π(1 α), (5) H L (cid:0) u(x )+βu(x ) u(1+α)+βu(1 α) (6) H L (cid:21) (cid:0) (1)nonnegativecurrency;(2)moneybalancesareusedupto smoothconsumptioninlowincomedates;(3)agentscan renouncemoneyandconsumeendowments. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS MODIFIED PLANNING PROBLEM First,themonetaryauthoritysetsaconstantinflationfactorπ. (1)nonnegativecurrency;(2)moneybalancesareusedupto smoothconsumptioninlowincomedates;(3)agentscan renouncemoneyandconsumeendowments. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS MODIFIED PLANNING PROBLEM First,themonetaryauthoritysetsaconstantinflationfactorπ. Next,givenπ,highincomecashagentschooseaperiodic consumptionvector(x ,x ) 0tomaximizestationary H L (cid:21) discountedutility 1 [u(x )+βu(x )] (3) 1 β2 H L (cid:0) subjectto x 1+α, (4) H (cid:20) x +πx =1+α+π(1 α), (5) H L (cid:0) u(x )+βu(x ) u(1+α)+βu(1 α) (6) H L (cid:21) (cid:0) INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS MODIFIED PLANNING PROBLEM First,themonetaryauthoritysetsaconstantinflationfactorπ. Next,givenπ,highincomecashagentschooseaperiodic consumptionvector(x ,x ) 0tomaximizestationary H L (cid:21) discountedutility 1 [u(x )+βu(x )] (3) 1 β2 H L (cid:0) subjectto x 1+α, (4) H (cid:20) x +πx =1+α+π(1 α), (5) H L (cid:0) u(x )+βu(x ) u(1+α)+βu(1 α) (6) H L (cid:21) (cid:0) (1)nonnegativecurrency;(2)moneybalancesareusedupto smoothconsumptioninlowincomedates;(3)agentscan renouncemoneyandconsumeendowments. Equaltreatmentofhighincomeandlowincomehouseholds meansthatthediscountedutilitiesareweightedequally. This givesthewelfarefunctionabove. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS MORE ON THE MODIFIED PLANNING PROBLEM Letx (π)andx (π)solvethepreviousproblem. Givenπ,the H L plannernowchoosesconsumptionvalues(c ,c ) 0forcredit H L (cid:21) householdstomaximizetheequal-treatmentwelfarefunction 1 [u(c )+u(c )] (7) 1 β2 H L (cid:0) subjecttotheresourceconstraint λ(c +c )+(1 λ)[x (π)+x (π)] =2, (8) H L H L (cid:0) andtheparticipationconstraint u(c )+βu(c ) u[x (π)]+βu[x (π)]. (9) H L H L (cid:21) INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS MORE ON THE MODIFIED PLANNING PROBLEM Letx (π)andx (π)solvethepreviousproblem. Givenπ,the H L plannernowchoosesconsumptionvalues(c ,c ) 0forcredit H L (cid:21) householdstomaximizetheequal-treatmentwelfarefunction 1 [u(c )+u(c )] (7) 1 β2 H L (cid:0) subjecttotheresourceconstraint λ(c +c )+(1 λ)[x (π)+x (π)] =2, (8) H L H L (cid:0) andtheparticipationconstraint u(c )+βu(c ) u[x (π)]+βu[x (π)]. (9) H L H L (cid:21) Equaltreatmentofhighincomeandlowincomehouseholds meansthatthediscountedutilitiesareweightedequally. This givesthewelfarefunctionabove. ThisSWFassignsequalweightstomembersofthesamegroup butpotentiallydifferentweightstodifferentgroups. AstrictlyutilitarianSWFwouldhaveequalweightsforall,that is,δ = λ. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS MORE ON THE MODIFIED PLANNING PROBLEM Ifc (π)andc (π)solvethepreviousproblemforagiven H L π >0,theplannerselectsthestationaryinflationfactorπto maximizethesocialwelfarefunction (π,δ) = δ u[c (π)]+u[c (π)] H L W f g +(1 δ) u[x (π)]+u[x (π)] . (10) H L (cid:0) f g AstrictlyutilitarianSWFwouldhaveequalweightsforall,that is,δ = λ. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS MORE ON THE MODIFIED PLANNING PROBLEM Ifc (π)andc (π)solvethepreviousproblemforagiven H L π >0,theplannerselectsthestationaryinflationfactorπto maximizethesocialwelfarefunction (π,δ) = δ u[c (π)]+u[c (π)] H L W f g +(1 δ) u[x (π)]+u[x (π)] . (10) H L (cid:0) f g ThisSWFassignsequalweightstomembersofthesamegroup butpotentiallydifferentweightstodifferentgroups. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS MORE ON THE MODIFIED PLANNING PROBLEM Ifc (π)andc (π)solvethepreviousproblemforagiven H L π >0,theplannerselectsthestationaryinflationfactorπto maximizethesocialwelfarefunction (π,δ) = δ u[c (π)]+u[c (π)] H L W f g +(1 δ) u[x (π)]+u[x (π)] . (10) H L (cid:0) f g ThisSWFassignsequalweightstomembersofthesamegroup butpotentiallydifferentweightstodifferentgroups. AstrictlyutilitarianSWFwouldhaveequalweightsforall,that is,δ = λ. Weallowlump-sumincometransfers. TheplannerthenmaximizestheSWFsubjecttotheeconomy’s resourceconstraint. Thisgivesafirstbestsolutionwithπ = β,RN =1,andsmooth consumptionforbothgroupsofagents. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS OPTIMUM INFLATION WITHOUT INCENTIVE CONSTRAINTS Tobuildupintuition,wefirstsolvetheplanner’sproblem ignoringforthemomenttheincentiveconstraints. TheplannerthenmaximizestheSWFsubjecttotheeconomy’s resourceconstraint. Thisgivesafirstbestsolutionwithπ = β,RN =1,andsmooth consumptionforbothgroupsofagents. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS OPTIMUM INFLATION WITHOUT INCENTIVE CONSTRAINTS Tobuildupintuition,wefirstsolvetheplanner’sproblem ignoringforthemomenttheincentiveconstraints. Weallowlump-sumincometransfers. Thisgivesafirstbestsolutionwithπ = β,RN =1,andsmooth consumptionforbothgroupsofagents. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS OPTIMUM INFLATION WITHOUT INCENTIVE CONSTRAINTS Tobuildupintuition,wefirstsolvetheplanner’sproblem ignoringforthemomenttheincentiveconstraints. Weallowlump-sumincometransfers. TheplannerthenmaximizestheSWFsubjecttotheeconomy’s resourceconstraint. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS OPTIMUM INFLATION WITHOUT INCENTIVE CONSTRAINTS Tobuildupintuition,wefirstsolvetheplanner’sproblem ignoringforthemomenttheincentiveconstraints. Weallowlump-sumincometransfers. TheplannerthenmaximizestheSWFsubjecttotheeconomy’s resourceconstraint. Thisgivesafirstbestsolutionwithπ = β,RN =1,andsmooth consumptionforbothgroupsofagents. Theplannermustnowchoose(π,c ,c )tosolvethemodified H L planningproblem,butstillignoringtheincentiveconstraints. Supposeδ =1,nowelfareweightonthecashcommunity. Then theplannerchoosesmaximalseigniorageπ˜ andsmoothsthe consumptionofthecreditcommunitycompletely. Supposeδ =0,nowelfareweightonthecreditcommunity. Then theplannerwillpushtheinflationfactorasclosetozeroas possible. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS SECOND BEST Supposethattheplannercannotimposealump-sumtaxonany agentbutmustinsteaduseinflationordeflationandredistribute theresultingseignoragefromonegrouptoanother. Supposeδ =1,nowelfareweightonthecashcommunity. Then theplannerchoosesmaximalseigniorageπ˜ andsmoothsthe consumptionofthecreditcommunitycompletely. Supposeδ =0,nowelfareweightonthecreditcommunity. Then theplannerwillpushtheinflationfactorasclosetozeroas possible. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS SECOND BEST Supposethattheplannercannotimposealump-sumtaxonany agentbutmustinsteaduseinflationordeflationandredistribute theresultingseignoragefromonegrouptoanother. Theplannermustnowchoose(π,c ,c )tosolvethemodified H L planningproblem,butstillignoringtheincentiveconstraints. Supposeδ =0,nowelfareweightonthecreditcommunity. Then theplannerwillpushtheinflationfactorasclosetozeroas possible. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS SECOND BEST Supposethattheplannercannotimposealump-sumtaxonany agentbutmustinsteaduseinflationordeflationandredistribute theresultingseignoragefromonegrouptoanother. Theplannermustnowchoose(π,c ,c )tosolvethemodified H L planningproblem,butstillignoringtheincentiveconstraints. Supposeδ =1,nowelfareweightonthecashcommunity. Then theplannerchoosesmaximalseigniorageπ˜ andsmoothsthe consumptionofthecreditcommunitycompletely. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS SECOND BEST Supposethattheplannercannotimposealump-sumtaxonany agentbutmustinsteaduseinflationordeflationandredistribute theresultingseignoragefromonegrouptoanother. Theplannermustnowchoose(π,c ,c )tosolvethemodified H L planningproblem,butstillignoringtheincentiveconstraints. Supposeδ =1,nowelfareweightonthecashcommunity. Then theplannerchoosesmaximalseigniorageπ˜ andsmoothsthe consumptionofthecreditcommunitycompletely. Supposeδ =0,nowelfareweightonthecreditcommunity. Then theplannerwillpushtheinflationfactorasclosetozeroas possible. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS MORE ON SECOND BEST Thesecondbesttradesoffthesetwoextremecases. THEOREM Thesecondbestoptimumallocationunderautilitariansocialwelfare functionsatisfies(c ,c ,x ,x ) = (c ,c ,x (π ),x (π )). Itis H L H L (cid:3)(cid:3) (cid:3)(cid:3) H (cid:3)(cid:3) L (cid:3)(cid:3) supportedbya“modifiedFriedmanrule”forsomeinflationfactor π (β,1),andanominalyieldsuchthatRN = π /β >1. (cid:3)(cid:3) (cid:3)(cid:3) 2 PROOF. Seetheappendix. Calltheassociatedinflationfactorπ¯. Perhapsmorecontroversial? “Themarketforunsecuredcreditcanbemadetoworkperfectly.” A2. Incomesharescannotbe“toosmooth.” A3. Itiswithinthepowerofthecentralplannertolowertherate ofreturnfacingusersofcashtothepointwheretheincentive constraintoncreditusersbecomesslack. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS KEY ASSUMPTIONS A1. Incomesharescannotbe“toovariable.” Calltheassociatedinflationfactorπ¯. Perhapsmorecontroversial? “Themarketforunsecuredcreditcanbemadetoworkperfectly.” A3. Itiswithinthepowerofthecentralplannertolowertherate ofreturnfacingusersofcashtothepointwheretheincentive constraintoncreditusersbecomesslack. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS KEY ASSUMPTIONS A1. Incomesharescannotbe“toovariable.” A2. Incomesharescannotbe“toosmooth.” Calltheassociatedinflationfactorπ¯. Perhapsmorecontroversial? “Themarketforunsecuredcreditcanbemadetoworkperfectly.” INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS KEY ASSUMPTIONS A1. Incomesharescannotbe“toovariable.” A2. Incomesharescannotbe“toosmooth.” A3. Itiswithinthepowerofthecentralplannertolowertherate ofreturnfacingusersofcashtothepointwheretheincentive constraintoncreditusersbecomesslack. Perhapsmorecontroversial? “Themarketforunsecuredcreditcanbemadetoworkperfectly.” INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS KEY ASSUMPTIONS A1. Incomesharescannotbe“toovariable.” A2. Incomesharescannotbe“toosmooth.” A3. Itiswithinthepowerofthecentralplannertolowertherate ofreturnfacingusersofcashtothepointwheretheincentive constraintoncreditusersbecomesslack. Calltheassociatedinflationfactorπ¯. “Themarketforunsecuredcreditcanbemadetoworkperfectly.” INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS KEY ASSUMPTIONS A1. Incomesharescannotbe“toovariable.” A2. Incomesharescannotbe“toosmooth.” A3. Itiswithinthepowerofthecentralplannertolowertherate ofreturnfacingusersofcashtothepointwheretheincentive constraintoncreditusersbecomesslack. Calltheassociatedinflationfactorπ¯. Perhapsmorecontroversial? INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS KEY ASSUMPTIONS A1. Incomesharescannotbe“toovariable.” A2. Incomesharescannotbe“toosmooth.” A3. Itiswithinthepowerofthecentralplannertolowertherate ofreturnfacingusersofcashtothepointwheretheincentive constraintoncreditusersbecomesslack. Calltheassociatedinflationfactorπ¯. Perhapsmorecontroversial? “Themarketforunsecuredcreditcanbemadetoworkperfectly.” Part(b)intuition. Asmallincreaseintheinflationtaxcreatesa creditmarketwhereonewouldotherwisenotexist. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS LEMMA 2 LEMMA Define (π,δ) = ∂ /∂π.Then(a) (π,δ) <0 π π (π,δ) W [π¯,π˜] [0, W λ],and(b)lim W (π,δ) = +∞whenπ π 1 π 8 2 (cid:2) ! W convergesfromabove. Part(a)intuition. Toraiseπaboveπ¯ doesnotimprovetheability oftheplannertosmooththeconsumptionofthecredit communityanyfurther. Doingsomerelytransfersincomefrom thecashcommunity. Thistransferwillreducesocialwelfare exceptwhenδ > λ. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS LEMMA 2 LEMMA Define (π,δ) = ∂ /∂π.Then(a) (π,δ) <0 π π (π,δ) W [π¯,π˜] [0, W λ],and(b)lim W (π,δ) = +∞whenπ π 1 π 8 2 (cid:2) ! W convergesfromabove. Part(a)intuition. Toraiseπaboveπ¯ doesnotimprovetheability oftheplannertosmooththeconsumptionofthecredit communityanyfurther. Doingsomerelytransfersincomefrom thecashcommunity. Thistransferwillreducesocialwelfare exceptwhenδ > λ. Part(b)intuition. Asmallincreaseintheinflationtaxcreatesa creditmarketwhereonewouldotherwisenotexist. Theoutcomeofanydeflationisthatmoneyhasahigherpayoff thancredit. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS LEMMA 3 LEMMA (π,δ)isnotdefinedforπ <1.Itisdecreasinginπforπ (π˜,1/R¯) a W ndconstantforπ 1/R¯. 2 (cid:21) Deflationviolatestheparticipationconstraintforhighincome credithouseholds. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS LEMMA 3 LEMMA (π,δ)isnotdefinedforπ <1.Itisdecreasinginπforπ (π˜,1/R¯) a W ndconstantforπ 1/R¯. 2 (cid:21) Deflationviolatestheparticipationconstraintforhighincome credithouseholds. Theoutcomeofanydeflationisthatmoneyhasahigherpayoff thancredit. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS THEOREM 4 THEOREM SupposeassumptionsA1,A2,andA3hold,and0< δ λ.Thenthe optimuminflationfactorisπ?(δ) >1andtheassociate (cid:20) dnominalinterest yield,RN (π?(δ),π?(δ)/β),isevenhigher. 2 U.S.A.:Onetotwopercent. RepublicofSouthAfrica:Threetosixpercent. Mainconclusion: independentcentralbankswillsetlowpositive inflationtargetsineconomiesthatpossesshighlydeveloped financialmarkets. Soundslike“comfortzones”articulatedbycentralbankers. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS CONCLUSIONS AND EXTENSIONS Inthispaper,theoptimalinflationtargetshouldstrikeabalance betweenthedeadweightlossfrominflationandthepotential improvementincreditmarketconditions. U.S.A.:Onetotwopercent. RepublicofSouthAfrica:Threetosixpercent. Soundslike“comfortzones”articulatedbycentralbankers. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS CONCLUSIONS AND EXTENSIONS Inthispaper,theoptimalinflationtargetshouldstrikeabalance betweenthedeadweightlossfrominflationandthepotential improvementincreditmarketconditions. Mainconclusion: independentcentralbankswillsetlowpositive inflationtargetsineconomiesthatpossesshighlydeveloped financialmarkets. RepublicofSouthAfrica:Threetosixpercent. Soundslike“comfortzones”articulatedbycentralbankers. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS CONCLUSIONS AND EXTENSIONS Inthispaper,theoptimalinflationtargetshouldstrikeabalance betweenthedeadweightlossfrominflationandthepotential improvementincreditmarketconditions. Mainconclusion: independentcentralbankswillsetlowpositive inflationtargetsineconomiesthatpossesshighlydeveloped financialmarkets. U.S.A.:Onetotwopercent. Soundslike“comfortzones”articulatedbycentralbankers. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS CONCLUSIONS AND EXTENSIONS Inthispaper,theoptimalinflationtargetshouldstrikeabalance betweenthedeadweightlossfrominflationandthepotential improvementincreditmarketconditions. Mainconclusion: independentcentralbankswillsetlowpositive inflationtargetsineconomiesthatpossesshighlydeveloped financialmarkets. U.S.A.:Onetotwopercent. RepublicofSouthAfrica:Threetosixpercent. INTRODUCTION MAINIDEAS ENVIRONMENT PLANNINGPROBLEMS OPTIMUMINFLATION THEROLEOFINCENTIVECONSTRAINTS CONCLUSIONS CONCLUSIONS AND EXTENSIONS Inthispaper,theoptimalinflationtargetshouldstrikeabalance betweenthedeadweightlossfrominflationandthepotential improvementincreditmarketconditions. Mainconclusion: independentcentralbankswillsetlowpositive inflationtargetsineconomiesthatpossesshighlydeveloped financialmarkets. U.S.A.:Onetotwopercent. RepublicofSouthAfrica:Threetosixpercent. Soundslike“comfortzones”articulatedbycentralbankers.

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APA

James Bullard (2008, October 9). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20081010_james_bullard

BibTeX

@misc{wtfs_regional_speeche_20081010_james_bullard,
  author = {James Bullard},
  title = {Regional President Speech},
  year = {2008},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20081010_james_bullard},
  note = {Retrieved via When the Fed Speaks corpus}
}